Professional Documents
Culture Documents
FORM 10-Q
Delaware
(State or other jurisdiction of
incorporation or organization)
1585 Broadway
New York, NY 10036
(Address of principal executive
offices, including zip code)
36-3145972
(212) 761-4000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
( 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files). Yes No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
Non-Accelerated Filer
(Do not check if a smaller reporting company)
Accelerated Filer
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No
As of April 30, 2015, there were 1,970,026,803 shares of the Registrants Common Stock, par value $0.01 per
share, outstanding.
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4
AVAILABLE INFORMATION
Morgan Stanley files annual, quarterly and current reports, proxy statements and other information with the U.S.
Securities and Exchange Commission (the SEC). You may read and copy any document we file with the SEC
at the SECs public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual,
quarterly and current reports, proxy and information statements and other information that issuers (including
Morgan Stanley) file electronically with the SEC. Morgan Stanleys electronic SEC filings are available to the
public at the SECs internet site, www.sec.gov.
Morgan Stanleys internet site is www.morganstanley.com. You can access Morgan Stanleys Investor Relations
webpage at www.morganstanley.com/about-us-ir. Morgan Stanley makes available free of charge, on or through
its Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the
Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC. Morgan Stanley also makes available, through its
Investor Relations webpage, via a link to the SECs internet site, statements of beneficial ownership of Morgan
Stanleys equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16
of the Exchange Act.
Morgan Stanley has a Corporate Governance webpage. You can access information about Morgan Stanleys
corporate governance at www.morganstanley.com/about-us-governance. Morgan Stanley posts the following on
its Corporate Governance webpage:
Amended and Restated Certificate of Incorporation;
Amended and Restated Bylaws;
Charters for its Audit Committee; Operations and Technology Committee; Compensation, Management
Development and Succession Committee; Nominating and Governance Committee; and Risk Committee;
Corporate Governance Policies;
Policy Regarding Communication with the Board of Directors;
Policy Regarding Director Candidates Recommended by Shareholders;
Policy Regarding Corporate Political Activities;
Policy Regarding Shareholder Rights Plan;
Code of Ethics and Business Conduct;
Code of Conduct; and
Integrity Hotline information.
Morgan Stanleys Code of Ethics and Business Conduct applies to all directors, officers and employees,
including its Chief Executive Officer, Chief Financial Officer and Deputy Chief Financial Officer. Morgan
Stanley will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required
to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (NYSE) on its internet
site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations,
1585 Broadway, New York, NY 10036 (212-761-4000). The information on Morgan Stanleys internet site is not
incorporated by reference into this report.
ii
Item 1.
Financial Statements.
MORGAN STANLEY
Condensed Consolidated Statements of Financial Condition
(dollars in millions, except share data)
(unaudited)
March 31,
2015
December 31,
2014
$ 19,683
20,610
$ 21,381
25,603
40,340
40,607
259,160
69,462
22,328
256,801
69,316
21,316
91,232
150,365
56,733
83,288
136,708
48,961
60,446
8,257
57,119
9,458
4,321
4,355
6,141
6,597
6,108
6,588
3,064
3,159
Assets
Cash and due from banks ($43 and $45 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable
interest entities, generally not available to the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements ($156 and $149 at
March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally not available to
the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading assets, at fair value ($134,954 and $127,342 were pledged to various parties at March 31, 2015 and December 31, 2014,
respectively) ($905 and $966 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest
entities, generally not available to the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities (includes $67,830 and $69,216 at fair value at March 31, 2015 and December 31, 2014, respectively) . . . . . . . .
Securities received as collateral, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell (includes $1,112 and $1,113 at fair value at March 31, 2015 and December 31, 2014,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans:
Held for investment (net of allowances of $165 and $149 at March 31, 2015 and December 31, 2014, respectively) . . . . . . . . . . .
Held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments ($449 and $467 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest
entities, generally not available to the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises, equipment and software costs (net of accumulated depreciation of $6,408 and $6,219 at March 31, 2015 and December 31,
2014, respectively) ($190 and $191 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable
interest entities, generally not available to the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets (net of accumulated amortization of $1,896 and $1,824 at March 31, 2015 and December 31, 2014, respectively)
(includes $5 and $6 at fair value at March 31, 2015 and December 31, 2014, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets ($59 at March 31, 2015 and December 31, 2014, related to consolidated variable interest entities, generally not available
to the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings (includes $2,468 and $1,765 at fair value at March 31, 2015 and December 31, 2014, respectively) . . . . . . . . .
Trading liabilities, at fair value ($1 at March 31, 2015 and December 31, 2014, related to consolidated variable interest entities,
generally non-recourse to the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligation to return securities received as collateral, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase (includes $605 and $612 at fair value at March 31, 2015 and December 31, 2014,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other secured financings (includes $4,241 and $4,504 at fair value at March 31, 2015 and December 31, 2014, respectively) ($321
and $348 at March 31, 2015 and December 31, 2014, respectively, related to consolidated variable interest entities, generally nonrecourse to the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities and accrued expenses ($68 and $72 at March 31, 2015 and December 31, 2014, respectively, related to consolidated
variable interest entities, generally non-recourse to the Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings (includes $31,261 and $31,774 at fair value at March 31, 2015 and December 31, 2014, respectively) . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingent liabilities (see Note 11)
Equity
Morgan Stanley shareholders equity:
Preferred stock (see Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.01 par value:
Shares authorized: 3,500,000,000 at March 31, 2015 and December 31, 2014;
Shares issued: 2,038,893,979 at March 31, 2015 and December 31, 2014;
Shares outstanding: 1,971,443,739 and 1,950,980,142 at March 31, 2015 and December 31, 2014, respectively
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock held in treasury, at cost, $0.01 par value:
Shares outstanding: 67,450,240 and 87,913,837 at March 31, 2015 and December 31, 2014, respectively . . . . . . . . . . .
Common stock issued to employee stock trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Morgan Stanley shareholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,360
10,742
$829,099
$801,510
$135,815
2,879
$133,544
2,261
125,057
27,384
107,381
25,685
61,488
25,527
69,949
25,219
12,207
190,175
12,085
181,069
17,556
155,545
19,441
152,772
753,633
729,406
7,520
6,020
20
23,355
46,740
2,431
(1,266)
20
24,249
44,625
2,127
(1,248)
(2,207)
(2,431)
(2,766)
(2,127)
74,162
1,304
70,900
1,204
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,466
72,104
$829,099
$801,510
MORGAN STANLEY
Condensed Consolidated Statements of Income
(dollars in millions, except share and per share data)
(unaudited)
Three Months Ended
March 31,
2015
2014
Revenues:
Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,357
3,650
266
1,186
2,681
171
1,308
2,962
359
1,216
2,549
294
9,311
8,688
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,484
888
1,343
1,035
Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
596
308
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,907
8,996
Non-interest expenses:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage, clearing and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information processing and communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and business development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,524
342
463
415
150
486
672
4,306
361
443
424
147
453
492
7,052
6,626
2,855
387
2,370
785
2,468
1,585
Discontinued operations:
Income (loss) from discontinued operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8)
(3)
(2)
(1)
(5)
(1)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,463
69
1,584
79
2,394
80
1,505
56
2,314
1,449
2,399 $
(5)
1,506
(1)
2,394
1,505
1.21 $
(0.01)
0.75
1.20
0.75
1.18
0.74
1.18
0.74
0.10
0.05
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,924,122,199
1,924,270,160
1,962,996,441
1,969,652,798
MORGAN STANLEY
Condensed Consolidated Statements of Comprehensive Income
(dollars in millions)
(unaudited)
Three Months Ended
March 31,
2015
2014
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of cash flow hedges(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in net unrealized gains on available for sale securities(3) . . . . . . . . . . . . . . . . .
Pension, postretirement and other related adjustments(4) . . . . . . . . . . . . . . . . . . . . . . . .
$2,463
$1,584
$ (222)
1
200
1
$ (20)
$ 143
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) applicable to nonredeemable noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,443
69
$1,727
79
$2,376
(2)
66
1
74
2
18
$1,630
(1) Amounts include provision for (benefit from) income taxes of $174 million and $(56) million for the quarters ended March 31, 2015 and
2014, respectively.
(2) Amount includes provision for income taxes of $1 million for the quarter ended March 31, 2014.
(3) Amounts include provision for income taxes of $121 million and $51 million for the quarters ended March 31, 2015 and 2014,
respectively.
(4) Amount includes provision for income taxes of $1 million for the quarter ended March 31, 2014.
MORGAN STANLEY
Condensed Consolidated Statements of Cash Flows
(dollars in millions)
(unaudited)
Three Months Ended
March 31,
2015
2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Income from equity method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation payable in common stock and options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (release) for credit losses on lending activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Cash deposited with clearing organizations or segregated under federal and other regulations or
requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading assets, net of Trading liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer and other receivables and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer and other payables and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used for) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Premises, equipment and software, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business dispositions, net of cash disposed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans:
Originations and purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities, payments and sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities:
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from paydowns and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other secured financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from:
Excess tax benefits associated with stock-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of preferred stock, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for:
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock and employee tax withholdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents include:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,463
(38)
295
321
(25)
21
63
56
(56)
311
326
(6)
33
(10)
(113)
267
11,414
(13,657)
308
(6,257)
8,052
(7,944)
(8,394)
(13,055)
(4,448)
30,790
(17,888)
(429)
(1,241)
16,866
10,554
(31,492)
4,781
(320)
2
135
(11,622)
8,956
(10,814)
6,254
(15,067)
13,810
1,290
48
(2,905)
(8,188)
1,853
981
(41)
(9,818)
618
(2)
399
2,271
(356)
(9)
(1,719)
4,269
173
226
1,493
11,339
84
150
7,701
(5,334)
(83)
(839)
(310)
9,951
(682)
(6,691)
46,984
$ 40,293 $
$ 19,683
20,610
$ 40,293
$ 1,584
(8,786)
(672)
(143)
519
59
(4,459)
59,883
55,424
$ 13,785
41,639
$ 55,424
MORGAN STANLEY
Condensed Consolidated Statements of Changes in Total Equity
Three Months Ended March 31, 2015 and 2014
(dollars in millions)
(unaudited)
Common
Common Stock
NonAccumulated
Stock Issued to redeemable
Additional
Employee
Other
Held in Employee
NonPreferred Common Paid-in Retained Stock Comprehensive Treasury Stock controlling Total
Stock
Stock
Capital Earnings Trusts Income (Loss) at Cost
Trusts
Interests Equity
BALANCE AT DECEMBER 31,
2014 . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to Morgan
Stanley . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to
nonredeemable noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . .
Shares issued under employee plans
and related tax effects . . . . . . . . . . .
Repurchases of common stock and
employee tax withholdings . . . . . . .
Net change in Accumulated other
comprehensive income . . . . . . . . . .
Issuance of preferred stock . . . . . . . . .
Other net increases . . . . . . . . . . . . . . .
BALANCE AT MARCH 31, 2015 . .
BALANCE AT DECEMBER 31,
2013 . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to Morgan
Stanley . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to
nonredeemable noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . .
Shares issued under employee plans
and related tax effects . . . . . . . . . . .
Repurchases of common stock and
employee tax withholdings . . . . . . .
Net change in Accumulated other
comprehensive income . . . . . . . . . .
Other net decreases . . . . . . . . . . . . . . .
BALANCE AT MARCH 31, 2014 . .
$6,020
$ 20
$24,249
$44,625
$(1,248)
$(2,766)
$(2,127)
$1,204
$72,104
(279)
69
69
(279)
(887)
304
1,398
(304)
511
(839)
(839)
1,500
(7)
(18)
(2)
33
$7,520
$ 20
$23,355
$46,740
$2,431
$(1,266)
$(2,207)
$(2,431)
$1,304
$75,466
$3,220
$ 20
$24,570
$42,172
$1,718
$(1,093)
$(2,968)
$(1,718)
$3,109
$69,030
$3,220
2,394
$2,127
(20)
1,493
33
(155)
79
79
(155)
(1,206)
381
1,553
(381)
347
(672)
(672)
125
$ 20
$23,364
1,505
2,394
$43,522
$2,099
$ (968)
$(2,087)
$(2,099)
18
(9)
$3,197
1,505
143
(9)
$70,268
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
The Company. Morgan Stanley, a financial holding company, is a global financial services firm that maintains
significant market positions in each of its business segmentsInstitutional Securities, Wealth Management and
Investment Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of
products and services to a large and diversified group of clients and customers, including corporations,
governments, financial institutions and individuals. Unless the context otherwise requires, the terms Morgan
Stanley or the Company mean Morgan Stanley (the Parent) together with its consolidated subsidiaries.
A brief summary of the activities of each of the Companys business segments is as follows:
Institutional Securities provides financial advisory and capital raising services, including: advice on mergers
and acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financing
and market-making activities in equity and fixed income securities and related products, including foreign
exchange and commodities; and investment activities.
Wealth Management provides brokerage and investment advisory services to individual investors and smallto-medium sized businesses and institutions covering various investment alternatives; financial and wealth
planning services; annuity and other insurance products; credit and other lending products; cash
management services; and retirement services; and engages in fixed income trading, which primarily
facilitates clients trading or investments in such securities.
Investment Management provides a broad array of investment strategies that span the risk/return spectrum
across geographies, asset classes and public and private markets to a diverse group of clients across the
institutional and intermediary channels as well as high net worth clients.
CanTerm. On March 27, 2014, the Company completed the sale of Canterm Canadian Terminals Inc.
(CanTerm), a public storage terminal operator for refined products with two distribution terminals in Canada.
As a result of the Companys level of continuing involvement with CanTerm, the results of CanTerm are
reported as a component of continuing operations within the Companys Institutional Securities business segment
for all periods presented. The gain on sale was approximately $45 million.
Basis of Financial Information. The Companys condensed consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), which
require the Company to make estimates and assumptions regarding the valuations of certain financial
instruments, the valuation of goodwill and intangible assets, compensation, deferred tax assets, the outcome of
legal and tax matters, allowance for credit losses and other matters that affect its condensed consolidated
financial statements and related disclosures. The Company believes that the estimates utilized in the preparation
of its condensed consolidated financial statements are prudent and reasonable. Actual results could differ
materially from these estimates. Intercompany balances and transactions have been eliminated.
The condensed consolidated financial statements should be read in conjunction with the Companys consolidated
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2014 (the 2014 Form 10-K). The condensed consolidated financial statements reflect all
adjustments of a normal recurring nature that are, in the opinion of management, necessary for the fair
presentation of the results for the interim period. The results of operations for interim periods are not necessarily
indicative of results for the entire year.
Prior period amounts have been recast for the Companys adoption of Investments in Qualified Affordable
Housing Projects, which the Company adopted on April 1, 2014.
6
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Consolidation. The condensed consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and other entities in which the Company has a controlling financial interest, including
certain variable interest entities (VIE) (see Note 6). For consolidated subsidiaries that are less than wholly
owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income
attributable to noncontrolling interests for such subsidiaries is presented as Net income (loss) applicable to
nonredeemable noncontrolling interests in the Companys condensed consolidated statements of income. The
portion of shareholders equity of such subsidiaries that is attributable to noncontrolling interests for such
subsidiaries is presented as Nonredeemable noncontrolling interests, a component of total equity, in the
Companys condensed consolidated statements of financial condition.
For entities where (1) the total equity investment at risk is sufficient to enable the entity to finance its activities
without additional subordinated financial support and (2) the equity holders bear the economic residual risks and
returns of the entity and have the power to direct the activities of the entity that most significantly affect its
economic performance, the Company consolidates those entities it controls either through a majority voting
interest or otherwise. For VIEs (i.e., entities that do not meet these criteria), the Company consolidates those
entities where the Company has the power to make the decisions that most significantly affect the economic
performance of the VIE and has the obligation to absorb losses or the right to receive benefits that could
potentially be significant to the VIE, except for certain VIEs that are money market funds, are investment
companies or are entities qualifying for accounting purposes as investment companies. Generally, the Company
consolidates those entities when it absorbs a majority of the expected losses or a majority of the expected residual
returns, or both, of the entities.
For investments in entities in which the Company does not have a controlling financial interest but has
significant influence over operating and financial decisions, the Company generally applies the equity method of
accounting with net gains and losses recorded within Other revenues (see Note 19). Where the Company has
elected to measure certain eligible investments at fair value in accordance with the fair value option, net gains
and losses are recorded within Investments revenues (see Note 3).
Equity and partnership interests held by entities qualifying for accounting purposes as investment companies are
carried at fair value.
The Companys significant regulated U.S. and international subsidiaries include Morgan Stanley & Co. LLC
(MS&Co.), Morgan Stanley Smith Barney LLC (MSSB LLC), Morgan Stanley & Co. International plc
(MSIP), Morgan Stanley MUFG Securities Co., Ltd. (MSMS), Morgan Stanley Bank, N.A. (MSBNA) and
Morgan Stanley Private Bank, National Association (MSPBNA).
Income Statement Presentation. The Company, through its subsidiaries and affiliates, provides a wide variety
of products and services to a large and diversified group of clients and customers, including corporations,
governments, financial institutions and individuals. In connection with the delivery of the various products and
services to clients, the Company manages its revenues and related expenses in the aggregate. As such, when
assessing the performance of its businesses, primarily in its Institutional Securities business segment, the
Company considers its trading, investment banking, commissions and fees, and interest income, along with the
associated interest expense, as one integrated activity.
2.
For a detailed discussion about the Companys significant accounting policies, see Note 2 to the consolidated
financial statements in the 2014 Form 10-K.
During the quarter ended March 31, 2015, other than the following, there were no significant updates made to the
Companys significant accounting policies.
7
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Accounting Standards Adopted.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. In
January 2014, the FASB issued an accounting update clarifying when an in-substance repossession or foreclosure
occurs; that is, when a creditor should be considered to have received physical possession of residential real
estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized
and the real estate property recognized. This guidance became effective for the Company beginning January 1,
2015 and will be applied prospectively. The adoption of this guidance did not have an impact on the Companys
condensed consolidated financial statements.
Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In June 2014, the FASB
issued an accounting update requiring repurchase-to-maturity transactions be accounted for as secured
borrowings consistent with the accounting for other repurchase agreements. This accounting update also requires
separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement
with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the
repurchase agreement. This guidance became effective for the Company beginning January 1, 2015. In addition,
new disclosures are required for sales of financial assets where the Company retains substantially all the
exposure throughout the term and for the collateral pledged and remaining maturity of repurchase and securities
lending agreements, which are effective January 1, 2015, and April 1, 2015, respectively. The adoption of this
guidance did not have a material impact on the Companys condensed consolidated financial statements.
3.
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The following fair value hierarchy tables present information about the Companys assets and liabilities measured at
fair value on a recurring basis at March 31, 2015 and December 31, 2014.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2015.
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,077
794
Significant
Observable
Inputs
(Level 2)
20,542
Significant
Counterparty
Unobservable
and Cash
Inputs
Collateral
(Level 3)
Netting
(dollars in millions)
Balance at
March 31,
2015
$ 17,077
21,336
17,871
17,844
108,266
560
55
213
7
321
1
145
2,523
1,726
362
829
391
2,523
1,733
683
885
749
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Physical commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
268
474
1,536
5,831
6,573
1,536
144,809
34,134
22,249
177,745
33,696
46
1,112
16,477
33
(79,871)
259,160
67,830
22,328
1,112
5
$201,192
$ 212,599
$16,515
$(79,871)
$ 350,435
759
134
702
4,623
(5,658)
20,542
8,582
11
38,413
26,437
2,389
1,772
1,373
854
15,089
668
6,605
2,368
296
180
67
424
822
4,789
486
2,389
2,068
1,553
921
15,513
1,490
11,394
2,854
31,118
765
7,064
230
38,182
109,261
492,341
27,064
88,293
49,364
14,799
332
(557,465)
2,021
988
356
1,308
3,350
(4,682)
(79,871)
495,121
28,052
88,783
51,374
22,772
332
(647,676)
114,728
3,341
(79,871)
38,758
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Liabilities at Fair Value
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Significant
Observable
Inputs
(Level 2)
2,468
Significant
Counterparty
Unobservable
and Cash
Inputs
Collateral
(Level 3)
Netting
(dollars in millions)
$
Balance at
March 31,
2015
2,468
14,714
797
247
14,714
1,044
15,511
15,740
247
2,336
15,758
18,076
8
5,447
6
13
23
23
8
5,470
6
36
38,250
5,474
226
46
50
5,520
38,526
682
84
794
4,957
(5,658)
465,492
26,091
88,496
54,805
13,769
84
(557,465)
2,517
1,972
59
3,780
2,005
(4,682)
(50,605)
468,691
28,063
88,639
59,379
20,731
84
(618,410)
859
91,272
5,651
(50,605)
47,177
70,360
27,303
99,555
48
451
4,108
29,523
5,747
33
154
133
1,738
(50,605)
125,057
27,384
605
4,241
31,261
$97,663
$ 136,153
$ 7,805
$(50,605)
$ 191,016
Transfers Between Level 1 and Level 2 During the Quarter Ended March 31, 2015.
For assets and liabilities that were transferred between Level 1 and Level 2 during the period, fair values are ascribed
as if the assets or liabilities had been transferred as of the beginning of the period.
During the quarter ended March 31, 2015, there were no material transfers between Level 1 and Level 2.
10
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2014.
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Assets at Fair Value
Trading assets:
U.S. government and agency securities:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,961
850
17,811
15,149
112,490
Significant
Observable
Inputs
(Level 2)
18,193
Significant
Counterparty
Unobservable
and Cash
Inputs
Collateral
(Level 3)
Netting
(dollars in millions)
Balance at
December 31,
2014
$ 16,961
19,043
18,193
7,888
41
36,004
23,078
2,049
1,991
1,484
583
15,800
741
6,088
2,167
175
96
76
386
1,152
5,874
285
2,049
2,166
1,580
659
16,186
1,893
11,962
2,452
30,903
1,357
8,044
272
38,947
114,119
495,026
30,813
72,769
45,967
18,042
376
(564,127)
2,484
1,369
249
1,586
2,268
(4,220)
(66,720)
498,173
32,182
73,101
48,124
24,415
376
(639,977)
512
98,866
3,736
(66,720)
36,394
58
225
7
344
3
198
2,569
1,746
343
835
323
2,569
1,753
687
896
746
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Physical commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
283
552
1,608
5,816
6,651
1,608
146,245
37,200
21,265
159,367
32,016
51
1,113
17,909
(66,720)
256,801
69,216
21,316
1,113
6
$204,710
$ 192,547
$17,915
$(66,720)
$ 348,452
663
83
571
4,105
(4,910)
11
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Liabilities at Fair Value
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading liabilities:
U.S. government and agency securities:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Significant
Observable
Inputs
(Level 2)
1,765
Significant
Counterparty
Unobservable
and Cash
Inputs
Collateral
(Level 3)
Netting
(dollars in millions)
$
Balance at
December 31,
2014
1,765
14,199
1,274
85
14,199
1,359
15,473
11,653
85
2,109
15,558
13,762
1
5,943
10
63
78
5
38
1
6,021
15
101
31,340
6,017
326
121
45
6,138
31,711
602
21
416
4,817
(4,910)
469,319
29,997
72,233
51,405
15,584
172
(564,127)
2,657
2,112
98
3,751
1,122
(4,220)
(40,837)
472,578
32,109
72,352
55,572
21,523
172
(614,094)
946
74,583
5,520
(40,837)
40,212
59,412
25,629
83,120
56
459
4,355
29,840
5,686
153
149
1,934
(40,837)
107,381
25,685
612
4,504
31,774
$85,041
$ 119,595
$ 7,922
$(40,837)
$ 171,721
(1) The Company holds or sells short for trading purposes equity securities issued by entities in diverse industries and of varying size.
(2) Level 3 asset derivative equity contracts increased by $57 million with a corresponding decrease in the balance of Level 2 asset derivative equity
contracts, and the balance of Level 3 liability derivative equity contracts increased by $842 million with a corresponding decrease in the balance
of Level 2 liability derivative equity contracts to correct the fair value level assigned to these contracts at December 31, 2014. The total amount
of asset and liability derivative equity contracts remained unchanged.
(3) For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral
netting are included in the column titled Counterparty and Cash Collateral Netting. For contracts with the same counterparty, counterparty
netting among positions classified within the same level is included within that level. For further information on derivative instruments and
hedging activities, see Note 10.
(4) Amount represents MSRs accounted for at fair value.
Transfers Between Level 1 and Level 2 During the Quarter Ended March 31, 2014.
For assets and liabilities that were transferred between Level 1 and Level 2 during the period, fair values are ascribed
as if the assets or liabilities had been transferred as of the beginning of the period.
During the quarter ended March 31, 2014, there were no material transfers between Level 1 and Level 2.
12
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis.
The following tables present additional information about Level 3 assets and liabilities measured at fair value on a
recurring basis for the quarters ended March 31, 2015 and 2014, respectively. Level 3 instruments may be hedged with
instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and
liabilities within the Level 3 category presented in the tables below do not reflect the related realized and unrealized
gains (losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2
categories.
Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the
Company has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for
assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value during
the period that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g.,
changes in unobservable long-dated volatilities) inputs.
For assets and liabilities that were transferred into Level 3 during the period, gains (losses) are presented as if the assets
or liabilities had been transferred into Level 3 at the beginning of the period; similarly, for assets and liabilities that
were transferred out of Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been
transferred out at the beginning of the period.
13
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended
March 31, 2015.
Total
Beginning Realized and
Balance at Unrealized
December 31,
Gains
2014
(Losses)(1) Purchases Sales Issuances
Settlements
Net
Transfers
Ending
Balance at
March 31,
2015
Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at March 31,
2015(2)
(dollars in millions)
41
(32) $
$ (1)
$11
$1
175
17
58
(40)
86
296
12
96
76
386
(2)
(2)
38
96
57
129
(10)
(29)
(141)
(35)
12
180
67
424
(2)
3
38
1,152
79
241
(397)
(253)
822
5,874
285
41
(10)
914
68
(213)
(1)
(1,807)
(5)
(20)
149
4,789
486
40
2
8,044
272
161
19
1,563
30
(831)
(98)
(2,065)
192
7
7,064
230
95
12
(173)
(743)
151
(2,165)
1,146
128
(247)
62
(273)
295
6
14
33
(11)
(30)
(176)
65
7
97
(54)
(37)
(511)
15
(13)
163
(59)
(496)
(984)
297
(2,472)
1,345
119
(252)
62
(324)
262
(1,784)
(35)
53
(217)
78
(405)
(2,310)
(133)
2,569
1,746
343
835
323
5,816
103
62
20
17
(12)
190
26
25
27
11
2
91
(175)
(107)
(28)
(34)
(5)
(349)
83
83
2,523
1,726
362
829
391
5,831
86
41
20
9
(10)
146
33
(1)
14
33
5
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Total
Beginning Realized and
Balance at Unrealized
December 31,
Gains
2014
(Losses)(1) Purchases Sales Issuances
Settlements
Net
Transfers
Ending
Balance at
March 31,
2015
Unrealized
Gains
(Losses) for
Level 3
Assets/
Liabilities
Outstanding
at March 31,
2015(2)
(dollars in millions)
78
(4)
(1) $
$(66)
$23
$(4)
5
38
5
6
(11)
(3)
23
5
6
121
45
7
1
(12)
13
7
(69)
(1)
46
50
7
1
33
33
115
(24)
(142)
(152)
153
149
1,934
(1)
(8)
17
154
133
1,738
(1)
1
10
(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Companys condensed consolidated statements of income
except for $190 million related to Trading assetsInvestments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the quarter ended March 31, 2015 related to assets and liabilities still outstanding at March 31, 2015.
(3) Net derivative and other contracts represent Trading assetsDerivative and other contracts net of Trading liabilitiesDerivative and other contracts. For
further information on derivative instruments and hedging activities, see Note 10.
(4) Net liability Level 3 derivative equity contracts increased by $785 million to correct the fair value level assigned to these contracts at December 31, 2014.
The total amount of derivative equity contracts remained unchanged at December 31, 2014.
During the quarter ended March 31, 2015, there were no material transfers into or out of Level 3.
15
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Quarter Ended
March 31, 2014.
Unrealized
Gains
(Losses) for
Level 3 Assets/
Total
Beginning Realized and
Ending
Liabilities
Balance at Unrealized
Balance at Outstanding
December 31,
Gains
Net
March 31, at March 31,
2013
2014
2014(2)
(Losses)(1) Purchases Sales Issuances Settlements Transfers
(dollars in millions)
27
47
108
103
522
1,468
5,129
27
7,404
190
$ (20) $
$ (1)
5
8
17
20
52
(289)
1
(186)
(1)
2
45
7
183
283
670
2
1,192
90
(8)
(81)
(3)
(188)
(494)
(122)
(3)
(899)
(21)
(8)
(51)
(383)
(442)
22
9
35
(17)
4
58
5
51
80
146
538
1,293
4,988
31
7,127
263
17
21
12
(292)
(238)
(3)
(133)
(77)
(7)
49
163
(1)
9
39
144
56
(1)
(7)
(70)
(277)
(51)
36
8
(106)
(25)
4
(52)
(12)
(17)
(77)
(121)
(231)
52
(1,099)
1,074
(1)
(150)
67
(6)
10
152
(1)
79
(6)
248
(1)
(354)
(134)
(158)
(326)
2,531
1,637
432
2,160
538
7,298
171
52
13
61
(14)
283
75
15
18
10
118
(201)
(61)
(12)
(12)
(11)
(297)
(1)
(57)
(16)
(2)
(75)
3
113
(147)
68
(831)
880
(4)
1
22
2
48
72
8
154
278
1,887
(1)
4
(4)
(46)
(5)
(51)
(3)
40
40
2
(4)
(25)
(8)
(176)
1
185
2,576
1,643
394
2,193
521
7,327
3
7
$
(9)
25
16
4
3
(43)
72
90
46
13
47
(14)
182
3
6
68
77
10
3
154
275
1,878
3
(4)
(1)
(4)
(27)
(1) Total realized and unrealized gains (losses) are primarily included in Trading revenues in the Companys condensed consolidated statements of income
except for $283 million related to Trading assetsInvestments, which is included in Investments revenues.
(2) Amounts represent unrealized gains (losses) for the quarter ended March 31, 2014 related to assets and liabilities still outstanding at March 31, 2014.
(3) Net derivative and other contracts represent Trading assetsDerivative and other contracts, net of Trading liabilitiesDerivative and other contracts. For
further information on derivative instruments and hedging activities, see Note 10.
16
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
During the quarter ended March 31, 2014, there were no material transfers into or out of Level 3.
Quantitative Information about and Sensitivity of Significant Unobservable Inputs Used in Recurring Level 3 Fair
Value Measurements at March 31, 2015 and December 31, 2014.
The disclosures below provide information on the valuation techniques, significant unobservable inputs, and their ranges and
averages for each major category of assets and liabilities measured at fair value on a recurring basis with a significant Level 3
balance. The level of aggregation and breadth of products cause the range of inputs to be wide and not evenly distributed
across the inventory. Further, the range of unobservable inputs may differ across firms in the financial services industry
because of diversity in the types of products included in each firms inventory. The following disclosures also include
qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs.
At March 31, 2015.
Balance at
March 31,
2015
(dollars in
millions)
Assets
Trading assets:
Corporate and other
debt:
Residential
mortgagebacked
securities
Commercial
mortgagebacked
securities
Asset-backed
securities
Corporate bonds
Collateralized
debt and loan
obligations
Loans and
lending
commitments
Range(1)
Averages(2)
296
Comparable pricing
0 to 80 points
34 points
180
Comparable pricing
0 to 100 points
56 points
67
424
Comparable pricing
Comparable pricing
63 to 75 points
3 to 125 points
73 points
93 points
822
Comparable pricing(3)
Correlation model
20 to 105 points
43% to 62%
77 points
50%
0% to 78%
7% to 88%
100%
4 to 10 times
0 times
39%
79%
100%
7 times
0 times
0 to 3 times
2 times
4,789
Other debt
486
Corporate
equities(4)
230
Valuation
Technique(s)
(496)
Option model
Comparable pricing(3)
Comparable pricing
Comparable pricing
Option model
Margin loan model(3)
Net asset value
Comparable pricing
Comparable pricing(3)
Market approach
Option model
17
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Balance at
March 31,
2015
(dollars in
millions)
Credit contracts
(984)
Valuation
Technique(s)
Comparable pricing
Correlation model(3)
Foreign exchange
contracts(7)
Equity
contracts(7)
Commodity
contracts
Investments(4):
Principal
investments
297
(2,472)
1,345
Option model
Option model
Long-term borrowings
-41% / -40%(6)
9 points
18 points
60%
-18% to 35%
3% / -8%(6)
-55% to -6%
19% to 95%
-18% / -11%(6)
65% / 81%(6)
28% to 62%
31% to 92%
0% to 1%
44% / 43%(6)
45% / 46%(6)
0% / 0%(6)
10% to 58%
-3% to 0%
40% to 99%
32%
-1%
68%
-40% to 10%
-15%
-18% to 71%
24% / 9%(6)
Comparable pricing
154
133
Comparable pricing
Discounted cash flow
Discounted cash flow(3)
Option model(3)
Comparable pricing
Discounted cash flow
Market approach(3)
Liabilities
Securities sold under
agreements to
repurchase
Other secured
financings
-42% to -40%
5 to 13 points
0 to 60 points
43% to 99%
391
1,738
Option model
Correlation model
Averages(2)
44% / 43%(6)
45% / 46%(6)
3% / -8%(6)
65% / 81%(6)
62% / 63%(6)
829
Range(1)
28% to 62%
31% to 92%
-18% to 35%
19% to 95%
60% to 64%
Option model
Other
11%
10 times
25%
4 to 18 times
32 times
$5 to $7
100%
10 times
25%
10 times
32 times
$7
100%
10%
10 times
8 to 11 times
19 times
100%
10%
10 times
9 times
19 times
100%
75 to 85 basis points
80 basis points
100 points
14%
74 to 94 basis points
20% to 51%
-2% to 0%
40% to 90%
100 points
14%
84 basis points
30%
-1%
64%
-70% to 35%
18% to 85%
47% to 62%
-33%
69%
50%
18
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
EBITDAEarnings before interest, taxes, depreciation and amortization
(1) The ranges of significant unobservable inputs are represented in points, percentages, basis points, times or megawatt hours. Points are a percentage of par;
for example, 80 points would be 80% of par. A basis point equals 1/100th of 1%; for example, 726 basis points would equal 7.26%.
(2) Amounts represent weighted averages except where simple averages and the median of the inputs are provided (see footnote 6 below). Weighted averages
are calculated by weighting each input by the fair value of the respective financial instruments except for collateralized debt and loan obligations,
principal investments, other debt, corporate bonds, long-term borrowings and derivative instruments where some or all inputs are weighted by risk.
(3) This is the predominant valuation technique for this major asset or liability class.
(4) Investments in funds measured using an unadjusted net asset value (NAV) are excluded.
(5) Credit Valuation Adjustment (CVA) and Funding Valuation Adjustments (FVA) are included in the balance, but excluded from the Valuation
Technique(s) and Significant Unobservable Input(s) in the table above. CVA is a Level 3 input when the underlying counterparty credit curve is
unobservable. FVA is a Level 3 input in its entirety given the lack of observability of funding spreads in the principal market.
(6) The data structure of the significant unobservable inputs used in valuing interest rate contracts, foreign exchange contracts and certain equity contracts
may be in a multi-dimensional form, such as a curve or surface, with risk distributed across the structure. Therefore, a simple average and median,
together with the range of data inputs, may be more appropriate measurements than a single point weighted average.
(7) Includes derivative contracts with multiple risks (i.e., hybrid products).
Sensitivity of the fair value to changes in the unobservable inputs:
(A) Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.
(B) Significant changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing) correlation drives a
redistribution of risk within the capital structure such that junior tranches become less (more) risky and senior tranches become more (less) risky.
(C) Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.
(D) There are no predictable relationships between the significant unobservable inputs.
Other debt
Corporate equities(4)
Valuation
Technique(s)
Range(1)
Averages(2)
175
Comparable pricing
3 to 90 points
15 points
96
76
386
Comparable pricing
Comparable pricing
Comparable pricing
0 to 7 points
0 to 62 points
1 to 160 points
1 points
23 points
90 points
1,152
5,874
285
272
Comparable pricing(3)
Correlation model
Corporate loan model
Margin loan model
19
20 to 100 points
66 points
47% to 65%
56%
36 to 753 basis points 373 basis points
150 to 451 basis points 216 basis points
3% to 37%
21%
2% to 3%
3%
-1%
-1%
15 to 105 points
89 points
0 to 75 points
39 points
15 points
15 points
15% to 54%
15%
0% to 71%
36%
83% to 96%
85%
100%
100%
6 to 9 times
8 times
0 times
0 times
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Balance at
December 31,
2014
(dollars in
millions)
Net derivative and other contracts(5):
Interest rate contracts
(173)
Credit contracts
Equity contracts(7)(8)
Commodity contracts
Option model
(743)
Comparable pricing
151
Correlation model(3)
Option model
(2,165)
1,146
Valuation
Technique(s)
Option model
Option model
835
Other
Liabilities
Trading liabilities:
Corporate and other debt:
Corporate bonds
Securities sold under agreements to
repurchase
Other secured financings
Long-term borrowings
323
78
153
149
1,934
Range(1)
Averages(2)
0 to 3 times
2 times
28% to 62%
38% to 104%
-9% to 35%
44% to 87%
69% to 71%
44% / 42%(6)
86% / 60%(6)
6% / -6%(6)
73% / 80%(6)
70% / 71%(6)
44% / 42%(6)
1% / 1%(6)
29%
-1%
72%
-50% to 10%
-16%
Option Model
20
11%
10 times
25%
4 to 14 times
23 times
$5 to $7
64% to 100%
11%
10 times
25%
10 times
23 times
$7
95%
10% to 13%
6 to 9 times
9 to 13 times
100%
11%
9 times
10 times
100%
-1%
10%
-1%
10%
-32%
67%
51%
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(1) The ranges of significant unobservable inputs are represented in points, percentages, basis points, times or megawatt hours. Points are a
percentage of par; for example, 90 points would be 90% of par. A basis point equals 1/100th of 1%; for example, 753 basis points would
equal 7.53%.
(2) Amounts represent weighted averages except where simple averages and the median of the inputs are provided (see footnote 6 below).
Weighted averages are calculated by weighting each input by the fair value of the respective financial instruments except for long-term
borrowings and derivative instruments where inputs are weighted by risk.
(3) This is the predominant valuation technique for this major asset or liability class.
(4) Investments in funds measured using an unadjusted NAV are excluded.
(5) CVA and FVA are included in the balance, but excluded from the Valuation Technique(s) and Significant Unobservable Input(s) in the
table above. CVA is a Level 3 input when the underlying counterparty credit curve is unobservable. FVA is a Level 3 input in its entirety
given the lack of observability of funding spreads in the principal market.
(6) The data structure of the significant unobservable inputs used in valuing interest rate contracts, foreign exchange contracts and certain equity
contracts may be in a multi-dimensional form, such as a curve or surface, with risk distributed across the structure. Therefore, a simple average
and median, together with the range of data inputs, may be more appropriate measurements than a single point weighted average.
(7) Includes derivative contracts with multiple risks (i.e., hybrid products).
(8) Net liability Level 3 derivative equity contracts increased by $785 million to correct the fair value level assigned to these contracts at
December 31, 2014. This correction did not result in a change to the Valuation Techniques, Significant Unobservable Inputs, Ranges or
Averages.
Sensitivity of the fair value to changes in the unobservable inputs:
(A) Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value
measurement.
(B) Significant changes in credit correlation may result in a significantly higher or lower fair value measurement. Increasing (decreasing)
correlation drives a redistribution of risk within the capital structure such that junior tranches become less (more) risky and senior
tranches become more (less) risky.
(C) Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value
measurement.
(D) There are no predictable relationships between the significant unobservable inputs.
The following provides a description of significant unobservable inputs included in the March 31, 2015 and
December 31, 2014 tables above for all major categories of assets and liabilities:
Cash synthetic basisthe measure of the price differential between cash financial instruments (cash
instruments) and their synthetic derivative-based equivalents (synthetic instruments). The range
disclosed in the table above signifies the number of points by which the synthetic bond equivalent price is
higher than the quoted price of the underlying cash bonds.
Comparable bond pricea pricing input used when prices for the identical instrument are not available.
Significant subjectivity may be involved when fair value is determined using pricing data available for
comparable instruments. Valuation using comparable instruments can be done by calculating an implied
yield (or spread over a liquid benchmark) from the price of a comparable bond, then adjusting that yield
(or spread) to derive a value for the bond. The adjustment to yield (or spread) should account for relevant
differences in the bonds such as maturity or credit quality. Alternatively, a price-to-price basis can be
assumed between the comparable instrument and bond being valued in order to establish the value of the
bond. Additionally, as the probability of default increases for a given bond (i.e., as the bond becomes
more distressed), the valuation of that bond will increasingly reflect its expected recovery level assuming
default. The decision to use price-to-price or yield/spread comparisons largely reflects trading market
convention for the financial instruments in question. Price-to-price comparisons are primarily employed
for residential mortgage-backed securities, commercial mortgage-backed securities (CMBS), assetbacked securities (ABS), collateralized debt obligations (CDOs), collateralized loan obligations
(CLOs), Other debt, interest rate contracts, foreign exchange contracts, Other secured financings and
distressed corporate bonds. Implied yield (or spread over a liquid benchmark) is utilized predominately
for non-distressed corporate bonds, loans and credit contracts.
21
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Comparable equity pricea price derived from equity raises, share buybacks and external bid levels,
etc. A discount or premium may be included in the fair value estimate.
Correlationa pricing input where the payoff is driven by more than one underlying risk. Correlation is a
measure of the relationship between the movements of two variables (i.e., how the change in one variable
influences a change in the other variable). Credit correlation, for example, is the factor that describes the
relationship between the probability of individual entities to default on obligations and the joint
probability of multiple entities to default on obligations.
Credit spreadthe difference in yield between different securities due to differences in credit quality.
The credit spread reflects the additional net yield an investor can earn from a security with more credit
risk relative to one with less credit risk. The credit spread of a particular security is often quoted in
relation to the yield on a credit risk-free benchmark security or reference rate, typically either U.S.
Treasury or London Interbank Offered Rate (LIBOR).
EBITDA multiple/Exit multiplethe ratio of the Enterprise Value to EBITDA, where the Enterprise
Value is the aggregate value of equity and debt minus cash and cash equivalents. The EBITDA multiple
reflects the value of the company in terms of its full-year EBITDA, whereas the exit multiple reflects the
value of the company in terms of its full-year expected EBITDA at exit. Either multiple allows
comparison between companies from an operational perspective as the effect of capital structure, taxation
and depreciation/amortization is excluded.
Equity alphaa calibration parameter used in the modeling of equity hybrid products.
Funding spreadthe difference between the general collateral rate (which refers to the rate applicable to
a broad class of U.S. Treasury issuances) and the specific collateral rate (which refers to the rate
applicable to a specific type of security pledged as collateral, such as a municipal bond). Repurchase
agreements and certain other secured financings are discounted based on collateral curves. The curves are
constructed as spreads over the corresponding overnight indexed swap (OIS) or LIBOR curves, with
the short end of the curve representing spreads over the corresponding OIS curves and the long end of the
curve representing spreads over LIBOR.
Implied weighted average cost of capital (WACC)the WACC implied by the current value of equity
in a discounted cash flow model. The model assumes that the cash flow assumptions, including
projections, are fully reflected in the current equity value, while the debt to equity ratio is held constant.
The WACC theoretically represents the required rate of return to debt and equity investors.
Interest rate curvethe term structure of interest rates (relationship between interest rates and the time to
maturity) and a markets measure of future interest rates at the time of observation. An interest rate curve
is used to set interest rate and foreign exchange derivative cash flows and is a pricing input used in the
discounting of any over-the-counter (OTC) derivative cash flow.
Price / Book ratiothe ratio used to compare a stocks market value with its book value. The ratio is
calculated by dividing the current closing price of the stock by the latest book value per share. This
multiple allows comparison between companies from an operational perspective.
Price / Earnings ratiothe ratio used to measure a companys equity value in relation to its earnings.
The ratio is calculated by dividing the equity value per share by the latest historical or forward-looking
earnings per share. The ratio results in a standardized metric that allows comparison between companies,
after also considering the effects of different leverage ratios and taxation rates.
Volatilitythe measure of the variability in possible returns for an instrument given how much that
instrument changes in value over time. Volatility is a pricing input for options and, generally, the lower
the volatility, the less risky the option. The level of volatility used in the valuation of a particular option
22
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
depends on a number of factors, including the nature of the risk underlying that option (e.g., the volatility
of a particular underlying equity security may be significantly different from that of a particular
underlying commodity index), the tenor and the strike price of the option.
Volatility skewthe measure of the difference in implied volatility for options with identical underliers
and expiry dates but with different strikes. The implied volatility for an option with a strike price that is
above or below the current price of an underlying asset will typically deviate from the implied volatility
for an option with a strike price equal to the current price of that same underlying asset.
Fair Value of Investments That Calculate Net Asset Value.
The Companys Investments measured at fair value were $6,573 million and $6,651 million at March 31, 2015
and December 31, 2014, respectively. The following table presents information solely about the Companys
investments in private equity funds, real estate funds and hedge funds measured at fair value based on NAV at
March 31, 2015 and December 31, 2014, respectively:
At March 31, 2015
At December 31, 2014
Unfunded
Unfunded
Fair Value Commitment Fair Value Commitment
(dollars in millions)
$2,523
1,733
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,939
419
76
39
149
$598
110
$2,569
1,753
433
76
39
139
$711
$5,009
$613
112
3
$728
(1) Fixed income/credit-related hedge funds, event-driven hedge funds and multi-strategy hedge funds are redeemable at least on a
three-month period basis, primarily with a notice period of 90 days or less. At March 31, 2015, approximately 32% of the fair value
amount of long-short equity hedge funds was redeemable at least quarterly, 51% is redeemable every six months and 17% of these funds
have a redemption frequency of greater than six months. At December 31, 2014, approximately 36% of the fair value amount of longshort equity hedge funds was redeemable at least quarterly, 47% is redeemable every six months and 17% of these funds have a
redemption frequency of greater than six months. The notice period for long-short equity hedge funds at March 31, 2015 and
December 31, 2014 was primarily greater than six months.
Private Equity Funds. Amount includes several private equity funds that pursue multiple strategies, including
leveraged buyouts, venture capital, infrastructure growth capital, distressed investments and mezzanine capital.
In addition, the funds may be structured with a focus on specific domestic or foreign geographic regions. These
investments are generally not redeemable with the funds. Instead, the nature of the investments in this category is
that distributions are received through the liquidation of the underlying assets of the fund. At March 31, 2015, it
was estimated that 7% of the fair value of the funds will be liquidated in the next five years, another 58% of the
fair value of the funds will be liquidated between five to 10 years and the remaining 35% of the fair value of the
funds will have a remaining life of greater than 10 years.
Real Estate Funds. Amount includes several real estate funds that invest in real estate assets such as
commercial office buildings, retail properties, multi-family residential properties, developments or hotels. In
addition, the funds may be structured with a focus on specific geographic domestic or foreign regions. These
investments are generally not redeemable with the funds. Distributions from each fund will be received as the
23
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
underlying investments of the funds are liquidated. At March 31, 2015, it was estimated that 8% of the fair value
of the funds will be liquidated within the next five years, another 55% of the fair value of the funds will be
liquidated between five to 10 years and the remaining 37% of the fair value of the funds will have a remaining
life of greater than 10 years.
Hedge Funds. Investments in hedge funds may be subject to initial period lock-up restrictions or gates. A hedge
fund lock-up provision is a provision that provides that, during a certain initial period, an investor may not make
a withdrawal from the fund. The purpose of a gate is to restrict the level of redemptions that an investor in a
particular hedge fund can demand on any redemption date.
Long-Short Equity Hedge Funds. Amount includes investments in hedge funds that invest, long or
short, in equities. Equity value and growth hedge funds purchase stocks perceived to be undervalued and
sell stocks perceived to be overvalued. Investments representing approximately 1% of the fair value of the
investments in this category cannot be redeemed currently because the investments include certain initial
period lock-up restrictions. The remaining restriction period for these investments subject to lock-up
restrictions was primarily over three years at March 31, 2015. Investments representing approximately
13% of the fair value of the investments in long-short equity hedge funds cannot be redeemed currently
because an exit restriction has been imposed by the hedge fund manager. The restriction period for these
investments subject to an exit restriction was primarily indefinite at March 31, 2015.
Fixed Income/Credit-Related Hedge Funds. Amount includes investments in hedge funds that employ
long-short, distressed or relative value strategies in order to benefit from investments in undervalued or
overvalued securities that are primarily debt or credit related. Investments representing approximately
13% of the fair value of the investments in this category cannot be redeemed currently because the
investments include certain initial period lock-up restrictions. The remaining restriction period for these
investments subject to lock-up restrictions was primarily over three years at March 31, 2015.
Event-Driven Hedge Funds. Amount includes investments in hedge funds that invest in event-driven
situations such as mergers, hostile takeovers, reorganizations or leveraged buyouts. This may involve the
simultaneous purchase of stock in companies being acquired and the sale of stock in its acquirer, with the
expectation to profit from the spread between the current market price and the ultimate purchase price of
the target company. At March 31, 2015, there were no restrictions on redemptions.
Multi-strategy Hedge Funds. Amount includes investments in hedge funds that pursue multiple
strategies to realize short- and long-term gains. Management of the hedge funds has the ability to
overweight or underweight different strategies to best capitalize on current investment opportunities. At
March 31, 2015, investments representing approximately 33% of the fair value of the investments in this
category cannot be redeemed currently because the investments include certain initial period lock-up
restrictions. The remaining restriction period for these investments subject to lock-up restrictions was
primarily over three years at March 31, 2015. Investments representing approximately 24% of the fair
value of the investments in multi-strategy hedge funds cannot be redeemed currently because an exit
restriction has been imposed by the hedge fund manager. The restriction period for these investments
subject to an exit restriction was indefinite at March 31, 2015.
24
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Fair Value Option.
The Company elected the fair value option for certain eligible instruments that are risk managed on a fair value
basis to mitigate income statement volatility caused by measurement basis differences between the elected
instruments and their associated risk management transactions or to eliminate complexities of applying certain
accounting models. The following table presents net gains (losses) due to changes in fair value for items
measured at fair value pursuant to the fair value option election for the quarters ended March 31, 2015 and 2014,
respectively:
Gains
(Losses)
Interest
Included in
Trading
Income
Net
Revenues (Expense)
Revenues
(dollars in millions)
(1)
(40)
(2)
937
(1)
(23)
(270)
(1)
(132)
(1)
(172)
(1)
(40)
(3)
805
1
(23)
(1)
(442)
(1) Of the total gains (losses) recorded in Trading revenues for short-term and long-term borrowings for the quarters ended March 31, 2015
and 2014, $125 million and $126 million, respectively, are attributable to changes in the credit quality of the Company and other credit
factors, and the respective remainder is attributable to changes in foreign currency rates or interest rates or movements in the reference
price or index for structured notes before the impact of related hedges.
In addition to the amounts in the above table, as discussed in Note 2 to the consolidated financial statements in
the 2014 Form 10-K, all of the instruments within Trading assets or Trading liabilities are measured at fair value,
either through the election of the fair value option or as required by other accounting guidance. The amounts in
the above table are included within Net revenues and do not reflect gains or losses on related hedging
instruments, if any.
The Company hedges the economics of market risk for short-term and long-term borrowings (i.e., risks other
than that related to the credit quality of the Company) as part of its overall trading strategy and manages the
market risks embedded within the issuance by the related business unit as part of the business units
portfolio. The gains and losses on related economic hedges are recorded in Trading revenues and largely offset
the gains and losses on short-term and long-term borrowings attributable to market risk.
25
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
At March 31, 2015 and December 31, 2014, a breakdown of the short-term and long-term borrowings measured
at fair value on a recurring basis by business unit responsible for risk-managing each borrowing is shown in the
table below:
Short-Term and Long-Term
Borrowings
At
At
March 31,
December 31,
2015
2014
(dollars in millions)
Business Unit
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit and foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,758
13,563
1,788
620
$17,253
13,545
2,105
636
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$33,729
$33,539
The following tables present information on the Companys short-term and long-term borrowings (primarily
structured notes), loans and unfunded lending commitments for which the fair value option was elected:
Gains (Losses) due to Changes in Instrument-Specific Credit Risk.
Three Months Ended
March 31,
2015
2014
(dollars in millions)
$125
77
9
$126
3
14
(1) The change in the fair value of short-term and long-term borrowings (primarily structured notes) includes an adjustment to reflect the
change in credit quality of the Company based upon observations of the Companys secondary bond market spreads and changes in other
credit factors.
(2) Loans and other debt instrument-specific credit gains (losses) were determined by excluding the non-credit components of gains and
losses, such as those due to changes in interest rates.
(3) Gains (losses) on unfunded lending commitments were generally determined based on the differential between estimated expected client
yields and contractual yields at each respective period-end.
$ (775)
14,482
13,026
$ (670)
14,990
12,916
(1) Short-term and long-term borrowings do not include structured notes where the repayment of the initial principal amount fluctuates based
on changes in the reference price or index.
26
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(2) The majority of the difference between principal and fair value amounts for loans and other debt emanates from the Companys
distressed debt trading business, which purchases distressed debt at amounts well below par.
(3) The aggregate fair value of loans that were in nonaccrual status, which includes all loans 90 or more days past due, was $1,656 million
and $1,367 million at March 31, 2015 and December 31, 2014, respectively. The aggregate fair value of loans that were 90 or more days
past due was $897 million and $643 million at March 31, 2015 and December 31, 2014, respectively.
The tables above exclude non-recourse debt from consolidated VIEs, liabilities related to failed sales of financial
assets, pledged commodities and other liabilities that have specified assets attributable to them.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis.
Certain assets and liabilities were measured at fair value on a non-recurring basis and are not included in the
tables above. These assets and liabilities may include loans, other investments, premises, equipment and software
costs, intangible assets and unfunded lending commitments.
The following tables present, by caption on the Companys condensed consolidated statements of financial
condition, the fair value hierarchy for those assets measured at fair value on a non-recurring basis for which the
Company recognized a non-recurring fair value adjustment for the quarters ended March 31, 2015 and 2014,
respectively.
Three Months Ended March 31, 2015.
Fair Value Measurements Using:
Total
Quoted Prices
Gains (Losses)
in Active
for the
Carrying
Markets for
Significant
Significant
Three Months
Value at
Identical
Observable Unobservable
Ended
March 31,
Assets
Inputs
Inputs
March 31,
2015
(Level 1)
(Level 2)
(Level 3)
2015(1)
(dollars in millions)
Assets:
Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments(3) . . . . . . . . . . . . . . . . . .
Premises, equipment and software
costs(4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,346
35
$2,521
$825
35
$(24)
(2)
(19)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,381
$2,521
$860
$(45)
Liabilities:
Other liabilities and accrued
expenses(2) . . . . . . . . . . . . . . . . . . . . . . .
$ 245
$ 203
$ 42
$ (7)
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 245
$ 203
$ 42
$ (7)
(1) Changes in the fair value of Loans and losses related to Other investments are recorded within Other revenues in the Companys
condensed consolidated statements of income. Losses related to Premises, equipment and software costs are recorded within Other
expenses if not held for sale and within Other revenues if held for sale. Losses related to Other liabilities and accrued expenses are
recorded within Other revenues related to a non-recurring fair value adjustment for certain unfunded lending commitments designated as
held for sale.
(2) Non-recurring changes in the fair value of loans and unfunded lending commitments held for investment or held for sale were calculated
using recently executed transactions; market price quotations; valuation models that incorporate market observable inputs where
possible, such as comparable loan or debt prices and credit default swap spread levels adjusted for any basis difference between cash and
derivative instruments; or default recovery analysis where such transactions and quotations are unobservable.
(3) Losses related to Other investments were determined primarily using discounted cash flow models and methodologies that incorporate
multiples of certain comparable companies.
(4) Losses related to Premises, equipment and software costs were determined primarily using a default recovery analysis.
27
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Three Months Ended March 31, 2014.
Carrying
Value at
March 31,
2014
Total
Gains (Losses)
for the
Three Months
Ended
March 31,
2014(1)
Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments(3) . . . . . . . . . . . . . . . . . . . .
Intangible assets(3) . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,663
302
28
1
$1,423
$240
302
28
$ (7)
(22)
(2)
(9)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,994
$1,424
$570
$(40)
(1) Changes in the fair value of Loans and losses related to Other investments are recorded within Other revenues, whereas losses related to
Premises, equipment and software costs, Intangible assets and Other assets are recorded within Other expenses in the Companys
condensed consolidated statements of income if not held for sale.
(2) Non-recurring changes in the fair value of loans held for investment or held for sale were calculated using recently executed transactions;
market price quotations; valuation models that incorporate market observable inputs where possible, such as comparable loan or debt
prices and credit default swap spread levels adjusted for any basis difference between cash and derivative instruments; or default
recovery analysis where such transactions and quotations are unobservable.
(3) Losses related to Other investments and Intangible assets were determined primarily using discounted cash flow models and
methodologies that incorporate multiples of certain comparable companies.
There were no significant liabilities measured at fair value on a non-recurring basis during the quarter ended
March 31, 2014.
Financial Instruments Not Measured at Fair Value.
The tables below present the carrying value, fair value and fair value hierarchy category of certain financial
instruments that are not measured at fair value in the Companys condensed consolidated statements of financial
condition. The tables below exclude certain financial instruments such as equity method investments and all nonfinancial assets and liabilities such as the value of the long-term relationships with our deposit customers.
The carrying value of cash and cash equivalents, including Interest bearing deposits with banks, and other shortterm financial instruments such as Securities purchased under agreements to resell; Securities borrowed;
Securities sold under agreements to repurchase; Securities loaned; certain Customer and other receivables and
Customer and other payables arising in the ordinary course of business; certain Deposits; Short-term borrowings;
and Other secured financings approximate fair value because of the relatively short period of time between their
origination and expected maturity.
For longer-dated Securities purchased under agreements to resell, Securities borrowed, Securities sold under
agreements to repurchase, Securities loaned and Other secured financings, fair value is determined using a
standard cash flow discounting methodology. The inputs to the valuation include contractual cash flows and
collateral funding spreads, which are estimated using various benchmarks and interest rate yield curves.
For held to maturity (HTM) securities, fair value is determined using quoted market prices.
28
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
For consumer and residential real estate loans and lending commitments where position-specific external price
data are not observable, the fair value is based on the credit risks of the borrower using a probability of default
and loss given default method, discounted at the estimated external cost of funding level. The fair value of
corporate loans and lending commitments is determined using recently executed transactions, market price
quotations (where observable), implied yields from comparable debt, and market observable credit default swap
spread levels along with proprietary valuation models and default recovery analysis where such transactions and
quotations are unobservable.
The fair value of long-term borrowings is generally determined based on transactional data or third-party pricing
for identical or comparable instruments, when available. Where position-specific external prices are not
observable, fair value is determined based on current interest rates and credit spreads for debt instruments with
similar terms and maturity.
Financial Instruments Not Measured at Fair Value at March 31, 2015 and December 31, 2014.
At March 31, 2015.
At March 31, 2015
Carrying
Value
Financial Assets:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks . . . . . . . . . . . . .
Cash deposited with clearing organizations or
segregated under federal and other regulations or
requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securitiesHTM securities . . . . . . . . . .
Securities purchased under agreements to resell . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer and other receivables(1) . . . . . . . . . . . . . .
Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other secured financings . . . . . . . . . . . . . . . . . . . . . .
Customer and other payables(1) . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . .
$ 19,683
20,610
$ 19,683
20,610
$19,683
20,610
40,340
1,632
90,120
150,365
52,511
68,703
40,340
1,636
90,126
150,366
52,410
69,855
40,340
706
$135,815
411
60,883
25,527
7,966
186,965
124,284
$135,844
411
60,992
25,553
7,994
186,965
128,464
930
89,466
150,366
47,610
16,807
$135,844
411
56,293
25,390
5,924
186,965
128,186
660
4,800
53,048
$
(1) Accrued interest, fees, and dividend receivables and payables where carrying value approximates fair value have been excluded.
(2) Amounts include all loans measured at fair value on a non-recurring basis.
29
4,699
163
2,070
278
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The fair value of the Companys unfunded lending commitments, primarily related to corporate lending in the
Companys Institutional Securities business segment, that are not carried at fair value at March 31, 2015 was
$1,132 million, of which $912 million and $220 million would be categorized in Level 2 and Level 3 of the fair
value hierarchy, respectively. The carrying value of these commitments, if fully funded, would be $93.6 billion.
At December 31, 2014.
At December 31, 2014
Carrying
Value
Financial Assets:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks . . . . . . . . . . . . .
Cash deposited with clearing organizations or
segregated under federal and other regulations or
requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securitiesHTM securities . . . . . . . . . .
Securities purchased under agreements to resell . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer and other receivables(1) . . . . . . . . . . . . . .
Loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other secured financings . . . . . . . . . . . . . . . . . . . . . .
Customer and other payables(1) . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . .
$ 21,381
25,603
$ 21,381
25,603
$21,381
25,603
40,607
100
82,175
136,708
45,116
66,577
40,607
100
82,165
136,708
45,028
67,800
40,607
100
$133,544
496
69,337
25,219
7,581
178,373
120,998
$133,572
496
69,433
25,244
7,881
178,373
124,961
81,981
136,696
39,945
18,212
$133,572
496
63,921
24,740
5,465
178,373
124,150
184
12
5,083
49,588
$
5,512
504
2,416
811
(1) Accrued interest, fees, and dividend receivables and payables where carrying value approximates fair value have been excluded.
(2) Amounts include all loans measured at fair value on a non-recurring basis.
The fair value of the Companys unfunded lending commitments, primarily related to corporate lending in the
Companys Institutional Securities business segment, that are not carried at fair value at December 31, 2014 was
$1,178 million, of which $928 million and $250 million would be categorized in Level 2 and Level 3 of the fair
value hierarchy, respectively. The carrying value of these commitments, if fully funded, would be $86.8 billion.
30
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
4.
Investment Securities.
The following tables present information about the Companys AFS securities, which are carried at fair value,
and HTM securities, which are carried at amortized cost. The net unrealized gains or losses on AFS securities are
reported on an after-tax basis as a component of Accumulated other comprehensive income (loss) (AOCI).
At March 31, 2015
Gross
Gross
Other-thanAmortized Unrealized Unrealized Temporary
Cost
Gains
Losses Impairment
(dollars in millions)
Fair
Value
$ 158
131
$ 17
38
$ 32,594
19,581
51,941
289
55
52,175
2,201
1,877
2,694
3,670
1,087
4,145
3
22
3
25
16
59
4
1
7
16
9
2,145
1,895
2,696
3,688
1,071
4,152
15,674
69
96
15,647
67,615
358
151
67,822
15
67,630
358
158
67,830
703
929
3
1
706
930
1,632
1,636
$362
$158
$69,466
31
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
At December 31, 2014
Gross
Gross
Other-thanAmortized Unrealized Unrealized Temporary
Cost
Gains
Losses Impairment
(dollars in millions)
Fair
Value
$ 42
77
$ 67
72
$ 35,830
18,035
53,885
119
139
53,865
2,288
1,820
2,433
3,640
1,087
4,169
1
11
10
18
76
6
5
22
20
8
2,213
1,825
2,428
3,628
1,067
4,179
15,437
40
137
15,340
69,322
159
276
69,205
15
69,337
11
159
HTM securities:
U.S. government securities:
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . .
Total HTM securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
280
69,216
100
100
100
100
$159
$280
$69,316
(1) U.S. agency securities are composed of three main categories consisting of agency-issued debt, agency mortgage pass-through pool
securities and collateralized mortgage obligations.
(2) FFELPFederal Family Education Loan Program. Amounts are backed by a guarantee from the U.S. Department of Education of at
least 95% of the principal balance and interest on such loans.
32
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The tables below present the fair value of Investment securities that are in an unrealized loss position:
8,285
66
565
762
533
1,491
$ 17
7
2,372
$
31
$ 5,304
5,353
$ 17
38
2,372
31
10,657
55
1,496
263
160
551
1,071
478
59
1
4
16
3
1,562
828
922
1,084
1,071
1,969
59
4
1
7
16
9
24
3
1
3
3,417
13
4,019
83
7,436
96
11,702
37
6,391
114
18,093
151
$ 44
$114
$18,102
$158
$ 6,391
14,149
42
706
2,034
905
1,523
$ 14
6
$ 5,924
4,133
$ 53
66
$17,334
6,872
$ 67
72
20
10,057
119
24,206
139
3
5
6
1,822
346
1,299
1,067
393
76
3
16
20
2
1,864
1,052
2,034
2,204
1,067
1,916
76
6
5
22
20
8
117
10,137
137
236
34,343
276
11
$34,354
$280
5,210
20
4,927
19,359
40
14,984
11
$ 44
$14,984
$236
As discussed in Note 2 to the Companys consolidated financial statements in the 2014 Form 10-K, AFS and
HTM securities with a current fair value less than their amortized cost are analyzed as part of the Companys
33
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
ongoing assessment of temporary versus other-than-temporarily impaired at the individual security level. The net
unrealized gains on AFS debt securities reported in the table above are primarily due to lower interest rates since those
securities were purchased. The risk of credit loss on securities in an unrealized loss position is considered minimal
because all of the Companys agency securities as well as the Companys ABS, CMBS and CLOs are highly rated and
because the Companys corporate bonds are all investment grade. The Company does not intend to sell and is not
likely to be required to sell its AFS debt securities prior to recovery of its amortized cost basis. The Company does not
expect to experience a credit loss on its AFS debt securities or HTM securities based on consideration of the relevant
information (as discussed in Note 2 to the Companys consolidated financial statements in the 2014 Form 10-K),
including for U.S. government and agency securities, the existence of an explicit and implicit guarantee provided by
the U.S. government. The Company believes that its AFS debt securities with an unrealized loss position were not
other-than-temporarily impaired at March 31, 2015 and December 31, 2014.
For AFS equity securities in an unrealized loss position, the Company does not intend to sell these securities or
expect to be required to sell these securities prior to the recovery of the amortized cost basis. The Company
believes that the equity securities with an unrealized loss in AOCI were not other-than-temporarily impaired at
March 31, 2015 and December 31, 2014.
The following table presents the amortized cost and fair value of Investment securities by contractual maturity
dates at March 31, 2015:
Amortized
Cost
Annualized
Fair Value Average Yield
(dollars in millions)
31,563
890
31,693
901
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,453
32,594
1,524
1,807
16,157
1,533
1,819
16,229
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,488
19,581
1.0%
1.7%
0.9%
1.4%
1.5%
51,941
52,175
1.2%
37
581
395
1,188
37
581
394
1,133
0.5%
1.0%
1.1%
1.5%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,201
2,145
Non-agency:
After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,877
1,895
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,877
1,895
6
2,413
275
6
2,414
276
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,694
2,696
34
1.7%
0.7%
1.0%
1.4%
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Amortized
Cost
Annualized
Fair Value Average Yield
(dollars in millions)
Corporate bonds:
Due within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
288
2,865
517
288
2,876
524
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,670
3,688
1,087
1,071
0.8%
1.5%
2.7%
1.4%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,087
1,071
124
875
3,146
124
875
3,153
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,145
4,152
15,674
15,647
1.3%
67,615
67,822
1.2%
0.7%
0.9%
0.9%
15
67,630
67,830
1.2%
HTM securities:
U.S. government securities:
U.S. Treasury securities:
Due within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
703
706
1.1%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
703
706
929
930
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
929
930
2.3%
1,632
1,636
1.8%
$69,262
$69,466
1.2%
See Note 6 for additional information on securities issued by VIEs, including U.S. agency mortgage-backed
securities, non-agency CMBS, auto loan asset-backed securities, CLO and FFELP student loan asset-backed
securities.
The following table presents information pertaining to gross realized gains and losses on sales of AFS securities
within the Companys Investment securities portfolio during the quarters ended March 31, 2015 and 2014:
Three Months Ended
March 31,
2015
2014
(dollars in millions)
$29
$7
$ 4
$1
Gross realized gains and losses are recognized in Other revenues in the Companys condensed consolidated
statements of income.
35
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
5.
Collateralized Transactions.
The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and
securities loaned transactions to, among other things, acquire securities to cover short positions and settle other
securities obligations, to accommodate customers needs and to finance the Companys inventory positions. The
Company manages credit exposure arising from such transactions by, in appropriate circumstances, entering into
master netting agreements and collateral agreements with counterparties that provide the Company, in the event
of a counterparty default (such as bankruptcy or a counterpartys failure to pay or perform), with the right to net a
counterpartys rights and obligations under such agreement and liquidate and set off collateral held by the
Company against the net amount owed by the counterparty. The Companys policy is generally to take
possession of securities purchased under agreements to resell and securities borrowed, and to receive securities
and cash posted as collateral (with rights of rehypothecation), although in certain cases, the Company may agree
for such collateral to be posted to a third-party custodian under a tri-party arrangement that enables the Company
to take control of such collateral in the event of a counterparty default. The Company also monitors the fair value
of the underlying securities as compared with the related receivable or payable, including accrued interest, and,
as necessary, requests additional collateral as provided under the applicable agreement to ensure such
transactions are adequately collateralized.
The following tables present information about the offsetting of these instruments and related collateral amounts.
For information related to offsetting of derivatives, see Note 10.
Gross
Amounts(1)
Net Exposure
Assets
Securities purchased under agreements
to resell . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . .
$155,656
159,201
$(64,424)
(8,836)
$ 91,232
150,365
$ (89,193)
(139,575)
$ 2,039
10,790
Liabilities
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . .
$125,912
34,363
$(64,424)
(8,836)
$ 61,488
25,527
$ (50,619)
(24,130)
$10,869
1,397
(1) Amounts include $3.9 billion of Securities purchased under agreements to resell, $5.8 billion of Securities borrowed, $12.5 billion of
Securities sold under agreements to repurchase and $1.2 billion of Securities loaned, which are either not subject to master netting
agreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally
enforceable.
(2) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legally
enforceable in the event of default and where certain other criteria are met in accordance with applicable offsetting accounting guidance.
(3) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legally
enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting
guidance.
36
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Gross
Amounts(1)
Net Exposure
Assets
Securities purchased under agreements
to resell . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . .
$148,234
145,556
$(64,946)
(8,848)
$ 83,288
136,708
$ (79,343)
(128,282)
$ 3,945
8,426
Liabilities
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . .
$134,895
34,067
$(64,946)
(8,848)
$ 69,949
25,219
$ (56,454)
(24,252)
$13,495
967
(1) Amounts include $3.9 billion of Securities purchased under agreements to resell, $4.2 billion of Securities borrowed, $15.6 billion of
Securities sold under agreements to repurchase and $0.7 billion Securities loaned, which are either not subject to master netting
agreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally
enforceable.
(2) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legally
enforceable in the event of default and where certain other criteria are met in accordance with applicable offsetting accounting guidance.
(3) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legally
enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting
guidance.
The Company also engages in margin lending to clients that allows the client to borrow against the value of
qualifying securities and is included within Customer and other receivables in the Companys condensed
consolidated statement of financial condition. Under these agreements and transactions, the Company receives
collateral, including U.S. government and agency securities, other sovereign government obligations, corporate
and other debt, and corporate equities. Customer receivables generated from margin lending activities are
collateralized by customer-owned securities held by the Company. The Company monitors required margin
levels and established credit limits daily and, pursuant to such guidelines, requires customers to deposit
additional collateral, or reduce positions, when necessary. Margin loans are extended on a demand basis and are
not committed facilities. Factors considered in the review of margin loans are the amount of the loan, the
intended purpose, the degree of leverage being employed in the account, and overall evaluation of the portfolio to
ensure proper diversification or, in the case of concentrated positions, appropriate liquidity of the underlying
collateral or potential hedging strategies to reduce risk. Additionally, transactions relating to concentrated or
restricted positions require a review of any legal impediments to liquidation of the underlying collateral.
Underlying collateral for margin loans is reviewed with respect to the liquidity of the proposed collateral
positions, valuation of securities, historic trading range, volatility analysis and an evaluation of industry
concentrations. For these transactions, adherence to the Companys collateral policies significantly limits the
Companys credit exposure in the event of a customer default. The Company may request additional margin
collateral from customers, if appropriate, and, if necessary, may sell securities that have not been paid for or
purchase securities sold but not delivered from customers. At March 31, 2015 and December 31, 2014, there
were approximately $30.5 billion and $29.0 billion, respectively, of customer margin loans outstanding.
Other secured financings include the liabilities related to transfers of financial assets that are accounted for as
financings rather than sales, consolidated VIEs where the Company is deemed to be the primary beneficiary, and
37
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
certain equity-linked notes and other secured borrowings. These liabilities are generally payable from the cash
flows of the related assets accounted for as Trading assets (see Notes 6 and 9).
The Company pledges its trading assets to collateralize repurchase agreements and other secured financings.
Pledged financial instruments that can be sold or repledged by the secured party are identified as Trading assets
(pledged to various parties) in the Companys condensed consolidated statements of financial condition. The
carrying value and classification of Trading assets by the Company that have been loaned or pledged to
counterparties where those counterparties do not have the right to sell or repledge the collateral were as follows:
At
At
March 31, December 31,
2015
2014
(dollars in millions)
Trading assets:
U.S. government and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other sovereign government obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,360
7,734
6,033
6,230
$11,769
6,084
6,061
7,421
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,357
$31,335
The Company receives collateral in the form of securities in connection with reverse repurchase agreements,
securities borrowed and derivative transactions, customer margin loans and securities-based lending. In many
cases, the Company is permitted to sell or repledge these securities held as collateral and use the securities to
secure repurchase agreements, to enter into securities lending and derivative transactions or for delivery to
counterparties to cover short positions. The Company additionally receives securities as collateral in connection
with certain securities-for-securities transactions in which the Company is the lender. In instances where the
Company is permitted to sell or repledge these securities, the Company reports the fair value of the collateral
received and the related obligation to return the collateral in its condensed consolidated statements of financial
condition. At March 31, 2015 and December 31, 2014, the total fair value of financial instruments received as
collateral where the Company is permitted to sell or repledge the securities was $598 billion and $546 billion,
respectively, and the fair value of the portion that had been sold or repledged was $452 billion and $403 billion,
respectively.
At March 31, 2015 and December 31, 2014, cash and securities deposited with clearing organizations or
segregated under federal and other regulations or requirements were as follows:
At
At
March 31, December 31,
2015
2014
(dollars in millions)
Cash deposited with clearing organizations or segregated under federal and other
regulations or requirements
Securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$40,340
15,587
$40,607
14,630
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$55,927
$55,237
(1) Securities deposited with clearing organizations or segregated under federal and other regulations or requirements are sourced from
Securities purchased under agreements to resell and Trading assets in the Companys condensed consolidated statements of financial
condition.
38
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
6.
The Company is involved with various special purpose entities (SPE) in the normal course of business. In most
cases, these entities are deemed to be VIEs.
The Company applies accounting guidance for consolidation of VIEs to certain entities in which equity investors
do not have the characteristics of a controlling financial interest. Except for certain asset management entities,
the primary beneficiary of a VIE is the party that both (1) has the power to direct the activities of a VIE that most
significantly affect the VIEs economic performance and (2) has an obligation to absorb losses or the right to
receive benefits that in either case could potentially be significant to the VIE. The Company consolidates entities
of which it is the primary beneficiary.
The Companys variable interests in VIEs include debt and equity interests, commitments, guarantees, derivative
instruments and certain fees. The Companys involvement with VIEs arises primarily from:
Interests purchased in connection with market-making activities, securities held in its Investment
securities portfolio and retained interests held as a result of securitization activities, including resecuritization transactions.
Guarantees issued and residual interests retained in connection with municipal bond securitizations.
Servicing of residential and commercial mortgage loans held by VIEs.
Loans made to and investments in VIEs that hold debt, equity, real estate or other assets.
Derivatives entered into with VIEs.
Structuring of credit-linked notes (CLN) or other asset-repackaged notes designed to meet the
investment objectives of clients.
Other structured transactions designed to provide tax-efficient yields to the Company or its clients.
The Company determines whether it is the primary beneficiary of a VIE upon its initial involvement with the
VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing
involvement with the VIE. This determination is based upon an analysis of the design of the VIE, including the
VIEs structure and activities, the power to make significant economic decisions held by the Company and by
other parties, and the variable interests owned by the Company and other parties.
The power to make the most significant economic decisions may take a number of different forms in different
types of VIEs. The Company considers servicing or collateral management decisions as representing the power
to make the most significant economic decisions in transactions such as securitizations or CDOs. As a result, the
Company does not consolidate securitizations or CDOs for which it does not act as the servicer or collateral
manager unless it holds certain other rights to replace the servicer or collateral manager or to require the
liquidation of the entity. If the Company serves as servicer or collateral manager, or has certain other rights
described in the previous sentence, the Company analyzes the interests in the VIE that it holds and consolidates
only those VIEs for which it holds a potentially significant interest of the VIE.
The structure of securitization vehicles and CDOs is driven by several parties, including loan seller(s) in securitization
transactions, the collateral manager in a CDO, one or more rating agencies, a financial guarantor in some transactions
and the underwriter(s) of the transactions, who serve to reflect specific investor demand. In addition, subordinate
investors, such as the B-piece buyer (i.e., investors in most subordinated bond classes) in commercial mortgagebacked securitizations or equity investors in CDOs, can influence whether specific loans are excluded from a CMBS
transaction or investment criteria in a CDO.
39
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
For many transactions, such as re-securitization transactions, CLNs and other asset-repackaged notes, there are no
significant economic decisions made on an ongoing basis. In these cases, the Company focuses its analysis on
decisions made prior to the initial closing of the transaction and at the termination of the transaction. Based upon
factors, which include an analysis of the nature of the assets, including whether the assets were issued in a transaction
sponsored by the Company and the extent of the information available to the Company and to investors, the number,
nature and involvement of investors, other rights held by the Company and investors, the standardization of the legal
documentation and the level of continuing involvement by the Company, including the amount and type of interests
owned by the Company and by other investors, the Company concluded in most of these transactions that decisions
made prior to the initial closing were shared between the Company and the initial investors. The Company focused its
control decision on any right held by the Company or investors related to the termination of the VIE. Most resecuritization transactions, CLNs and other asset-repackaged notes have no such termination rights.
Except for consolidated VIEs included in other structured financings and managed real estate partnerships in the
tables below, the Company accounts for the assets held by the entities primarily in Trading assets and the
liabilities of the entities as Other secured financings in its condensed consolidated statements of financial
condition. For consolidated VIEs included in other structured financings, the Company accounts for the assets
held by the entities primarily in Premises, equipment and software costs, and Other assets in its condensed
consolidated statements of financial condition. For consolidated VIEs included in managed real estate
partnerships, the Company accounts for the assets held by the entities primarily in Trading assets in its condensed
consolidated statements of financial condition. Except for consolidated VIEs included in other structured
financings, the assets and liabilities are measured at fair value, with changes in fair value reflected in earnings.
The assets owned by many consolidated VIEs cannot be removed unilaterally by the Company and are not
generally available to the Company. The related liabilities issued by many consolidated VIEs are non-recourse to
the Company. In certain other consolidated VIEs, the Company either has the unilateral right to remove assets or
provide additional recourse through derivatives such as total return swaps, guarantees or other forms of
involvement.
As part of the Companys Institutional Securities business segments securitization and related activities, the
Company has provided, or otherwise agreed to be responsible for, representations and warranties regarding
certain assets transferred in securitization transactions sponsored by the Company (see Note 11).
The following tables present information at March 31, 2015 and December 31, 2014 about VIEs that the
Company consolidates. Consolidated VIE assets and liabilities are presented after intercompany eliminations and
include assets financed on a non-recourse basis:
Mortgage-and
Asset-Backed
Securitizations
VIE assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$508
$311
Mortgage-and
Asset-Backed
Securitizations
VIE assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
$563
$337
$302
$ 2
$903
$ 77
$288
$ 4
$928
$ 80
Other
$1,150
$
Other
$1,199
$
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
In general, the Companys exposure to loss in consolidated VIEs is limited to losses that would be absorbed on
the VIEs assets recognized in its financial statements, net of losses absorbed by third-party holders of the VIEs
liabilities. At March 31, 2015 and December 31, 2014, managed real estate partnerships reflected nonredeemable
noncontrolling interests in the Companys condensed consolidated financial statements of $253 million and $240
million, respectively. The Company also had additional maximum exposure to losses of approximately $106
million and $105 million at March 31, 2015 and December 31, 2014, respectively. This additional exposure
relates primarily to certain derivatives (e.g., instead of purchasing senior securities, the Company has sold credit
protection to synthetic CDOs through credit derivatives that are typically related to the most senior tranche of the
CDO) and commitments, guarantees and other forms of involvement.
The following tables present information about certain non-consolidated VIEs in which the Company had
variable interests at March 31, 2015 and December 31, 2014. The tables include all VIEs in which the Company
has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other
criteria. Most of the VIEs included in the tables below are sponsored by unrelated parties; the Companys
involvement generally is the result of the Companys secondary market-making activities and securities held in
its Investment securities portfolio (see Note 4):
Mortgage-and
Asset-Backed
Securitizations
Other
Structured
Financings
Other
$177,995
$24,901
$4,194
$1,996
$17,375
$ 15,977
15
462
$ 2,352
2
1,529
79
2,566
$1,159
612
$ 3,788
145
482
$ 16,454
$ 3,883
$2,645
$1,771
$ 4,415
$ 15,977
15
$ 2,352
2
79
5
$ 741
$ 3,788
67
$ 15,992
$ 2,354
84
$ 741
$ 3,855
45
45
4
4
(1) Mortgage- and asset-backed securitizations include VIE assets as follows: $25.6 billion of residential mortgages; $74.3 billion of
commercial mortgages; $20.3 billion of U.S. agency collateralized mortgage obligations; and $57.8 billion of other consumer or
commercial loans.
(2) Mortgage- and asset-backed securitizations include VIE debt and equity interests as follows: $1.6 billion of residential mortgages; $2.6
billion of commercial mortgages; $4.3 billion of U.S. agency collateralized mortgage obligations; and $7.5 billion of other consumer or
commercial loans.
41
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Mortgage-and
Asset-Backed
Securitizations
Other
$174,548
$26,567
$3,449
$2,040
$19,237
$ 15,028
15
1,054
$ 3,062
2
432
13
2,212
$1,158
617
$ 3,884
164
429
$ 16,097
$ 3,496
$2,225
$1,775
$ 4,477
$ 15,028
15
$ 3,062
2
13
4
$ 741
$ 3,884
74
$ 15,043
$ 3,064
17
$ 741
$ 3,958
57
57
5
5
(1) Mortgage- and asset-backed securitizations include VIE assets as follows: $30.8 billion of residential mortgages; $71.9 billion of
commercial mortgages; $20.6 billion of U.S. agency collateralized mortgage obligations; and $51.2 billion of other consumer or
commercial loans.
(2) Mortgage- and asset-backed securitizations include VIE debt and equity interests as follows: $1.9 billion of residential mortgages; $2.4
billion of commercial mortgages; $4.0 billion of U.S. agency collateralized mortgage obligations; and $6.8 billion of other consumer or
commercial loans.
The Companys maximum exposure to loss often differs from the carrying value of the variable interests held by
the Company. The maximum exposure to loss is dependent on the nature of the Companys variable interest in
the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return
swaps, written put options, and the fair value of certain other derivatives and investments the Company has made
in the VIEs. Liabilities issued by VIEs generally are non-recourse to the Company. Where notional amounts are
utilized in quantifying maximum exposure related to derivatives, such amounts do not reflect fair value writedowns already recorded by the Company.
The Companys maximum exposure to loss does not include the offsetting benefit of any financial instruments
that the Company may utilize to hedge these risks associated with the Companys variable interests. In addition,
the Companys maximum exposure to loss is not reduced by the amount of collateral held as part of a transaction
with the VIE or any party to the VIE directly against a specific exposure to loss.
Securitization transactions generally involve VIEs. Primarily as a result of its secondary market-making
activities, the Company owned additional securities issued by securitization SPEs for which the maximum
exposure to loss is less than specific thresholds. These additional securities totaled $12.9 billion and $14.0 billion
at March 31, 2015 and December 31, 2014, respectively. These securities were either retained in connection with
42
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
transfers of assets by the Company, acquired in connection with secondary market-making activities or held in
the Companys AFS securities within its Investment securities portfolio (see Note 4). At March 31, 2015,
securities issued by securitization SPEs consisted of $1.1 billion of securities backed by residential mortgage
loans, $7.7 billion of securities backed by U.S. agency collateralized mortgage obligations, $1.1 billion of
securities backed by commercial mortgage loans, $0.4 billion of securities backed by CDOs or CLOs and $2.6
billion backed by other consumer loans, such as credit card receivables, automobile loans and student loans. At
December 31, 2014, securities issued by securitization SPEs consisted of $1.0 billion of securities backed
primarily by residential mortgage loans, $8.5 billion of securities backed by U.S. agency collateralized mortgage
obligations, $1.2 billion of securities backed by commercial mortgage loans, $0.5 billion of securities backed by
CDOs or CLOs and $2.7 billion backed by other consumer loans, such as credit card receivables, automobile
loans and student loans. The Companys primary risk exposure is to the securities issued by the SPE owned by
the Company, with the risk highest on the most subordinate class of beneficial interests. These securities
generally are included in Trading assetsCorporate and other debt or AFS securities within the Companys
Investment securities portfolio and are measured at fair value (see Note 3). The Company does not provide
additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees or
similar derivatives. The Companys maximum exposure to loss generally equals the fair value of the securities
owned.
The Companys transactions with VIEs primarily include securitizations, municipal tender option bond trusts,
credit protection purchased through CLNs, other structured financings, collateralized loan and debt obligations,
equity-linked notes, managed real estate partnerships and asset management investment funds. The Companys
continuing involvement in VIEs that it does not consolidate can include ownership of retained interests in
Company-sponsored transactions, interests purchased in the secondary market (both for Company-sponsored
transactions and transactions sponsored by third parties), derivatives with securitization SPEs (primarily interest
rate derivatives in commercial mortgage and residential mortgage securitizations and credit derivatives in which
the Company has purchased protection in synthetic CDOs). Such activities are further described in Note 7 to the
Companys consolidated financial statements in its 2014 Form 10-K.
43
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Transfers of Assets with Continuing Involvement.
The following tables present information at March 31, 2015 regarding transactions with SPEs in which the
Company, acting as principal, transferred financial assets with continuing involvement and received sales
treatment:
Residential
Mortgage
Loans
CreditLinked
Notes and
Other(1)
$25,810
$55,160
$18,786
$18,935
1
100
155
91
938
101
246
938
$ 1,213
1
78
184
116
37
350
81
79
300
37
431
$
$
$
$
431
$
$
$
$
131
391
1,213
Level 1
Total
$1,002 $ 92
29 1,375
$1,094
1,404
$1,031
$1,467
$2,498
$ 569
196
3
79
$ 572
275
$ 765
82
$ 847
$
$
$ 496
$ 66
$ 66
$ 325
$ 562
$ 391
44
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The following tables present information at December 31, 2014 regarding transactions with SPEs in which the
Company, acting as principal, transferred assets with continuing involvement and received sales treatment:
Residential
Mortgage
Loans
CreditLinked
Notes and
Other(1)
$26,549
$58,660
$20,826
$24,011
10
98
117
120
$ 1,019
108
237
$ 1,019
$ 1,321
32
32
129
72
61
423
59
64
201
61
482
$
$
$
$
495
$
$
$
$
138
86
57
1,264
Level 1
Total
$1,166 $ 37
123 1,359
$1,203
1,482
$1,289
$1,396
$2,685
$ 644
129
1
34
$ 645
163
$ 773
35
$ 808
$
$
$ 559
$ 82
$
$
74
4
$ 633
$ 86
Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in
the Companys condensed consolidated statements of income. The Company may act as underwriter of the
beneficial interests issued by these securitization vehicles. Investment banking underwriting net revenues are
recognized in connection with these transactions. The Company may retain interests in the securitized financial
assets as one or more tranches of the securitization. These retained interests are included in the Companys
condensed consolidated statements of financial condition at fair value. Any changes in the fair value of such
retained interests are recognized in the Companys condensed consolidated statements of income.
45
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Net gains on sale of assets in securitization transactions at the time of the sale were not material in the first
quarter of 2015 and 2014.
During the quarter ended March 31, 2015 and 2014, the Company received proceeds from new securitization
transactions of $4.9 billion and $6.0 billion, respectively. During the quarter ended March 31, 2015 and 2014, the
Company received proceeds from cash flows from retained interests in securitization transactions of $0.9 billion
and $0.6 billion, respectively.
The Company has provided, or otherwise agreed to be responsible for, representations and warranties regarding
certain assets transferred in securitization transactions sponsored by the Company (see Note 11).
In addition, in connection with its underwriting of CLO transactions for unaffiliated sponsors, the Company
received proceeds from sale of corporate loans sold to those SPEs of $0.3 billion and $0.4 billion during the
quarters ended March 31, 2015 and 2014, respectively. Net gains on sale of corporate loans to CLO transactions
at the time of sale were not material for the quarters ended March 31, 2015 and 2014.
The Company also enters into transactions in which it sells equity securities and contemporaneously enters into
bilateral OTC equity derivatives with the purchasers of the securities, through which derivatives it retains the
exposure to the securities. For transactions where the derivatives were outstanding at March 31, 2015, the
carrying value of assets derecognized at the time of sale and the gross cash proceeds were $14.0 billion. In
addition, the fair value at March 31, 2015 of the assets sold was $14.7 billion while the fair value of derivative
assets and derivative liabilities recognized in the Companys condensed consolidated statement of financial
condition at March 31, 2015 was $237 million and $48 million, respectively (see Note 10).
Failed Sales.
In order to be treated as a sale of assets for accounting purposes, a transaction must meet all of the criteria
stipulated in the accounting guidance for the transfer of financial assets. A transfer that fails to meet these
criteria, is treated as a failed sale. In such cases, the Company continues to recognize the assets in Trading assets,
and the Company recognizes the associated liabilities in Other secured financings in its condensed consolidated
statements of financial condition (see Note 9).
The assets transferred to unconsolidated VIEs in transactions accounted for as failed sales cannot be removed
unilaterally by the Company and are not generally available to the Company. The related liabilities are also nonrecourse to the Company. In certain other failed sale transactions, the Company has the right to remove assets or
provide additional recourse through derivatives such as total return swaps, guarantees or other forms of
involvement.
The following table presents information about the carrying value (equal to fair value) of assets and liabilities
resulting from transfers of financial assets treated by the Company as secured financings:
At March 31, 2015 At December 31, 2014
Carrying Value of
Carrying Value of
Assets Liabilities
Assets
Liabilities
(dollars in millions)
Credit-linked notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity-linked transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
$ 28
11
244
$ 28
11
244
$ 47
16
289
$ 39
16
289
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
7.
Loans.
The Companys loans held for investment are recorded at amortized cost, and its loans held for sale are recorded
at lower of cost or fair value in the Companys condensed consolidated statements of financial condition.
The Companys outstanding loans at March 31, 2015 and December 31, 2014 included the following:
Corporate loans . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . . .
Wholesale real estate loans . . . . . . . . . .
Total loans, gross of allowance for
loan losses . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . .
Total loans, net of allowance for loan
losses . . . . . . . . . . . . . . . . . . . . . . . . .
$21,121
17,372
16,853
5,265
60,611
(165)
$60,446
$7,360
154
743
8,257
$8,257
$28,481
17,372
17,007
6,008
68,868
(165)
$68,703
$19,659
16,576
15,735
5,298
57,268
(149)
$57,119
$8,200
114
1,144
9,458
$9,458
$27,859
16,576
15,849
6,442
66,726
(149)
$66,577
(1) Amounts include loans that are made to non-U.S. borrowers of $6,643 million and $7,017 million at March 31, 2015 and December 31,
2014, respectively.
(2) At March 31, 2015, loans at fixed interest rates and floating or adjustable interest rates were $6,720 million and $61,983 million,
respectively. At December 31, 2014, loans at fixed interest rates and floating or adjustable interest rates were $6,663 million and
$59,914 million, respectively.
The above table does not include Loans and lending commitments held at fair value of $11,394 million and
$11,962 million that were recorded as Trading assets in the Companys condensed consolidated statement of
financial condition at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, Loans and
lending commitments held at fair value consisted of $5,689 million of corporate loans, $2,044 million of
residential real estate loans and $3,661 million of wholesale real estate loans. At December 31, 2014, Loans and
lending commitments held at fair value consisted of $7,093 million of corporate loans, $1,682 million of
residential real estate loans and $3,187 million of wholesale real estate loans. See Note 3 for further information
regarding Loans and lending commitments held at fair value.
Credit Quality.
The Companys Credit Risk Management Department evaluates new obligors before credit transactions are
initially approved, and at least annually thereafter for corporate and wholesale real estate loans. For corporate
loans, credit evaluations typically involve the evaluation of financial statements, assessment of leverage,
liquidity, capital strength, asset composition and quality, market capitalization and access to capital markets, cash
flow projections and debt service requirements, and the adequacy of collateral, if applicable. The Companys
Credit Risk Management Department also evaluates strategy, market position, industry dynamics, obligors
management and other factors that could affect an obligors risk profile. For wholesale real estate loans, the
credit evaluation is focused on property and transaction metrics including property type, loan-to-value ratio,
occupancy levels, debt service ratio, prevailing capitalization rates, and market dynamics. For residential real
estate and consumer loans, the initial credit evaluation typically includes, but is not limited to, review of the
47
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
obligors income, net worth, liquidity, collateral, loan-to-value ratio, and credit bureau information. Subsequent
credit monitoring for residential real estate loans is performed at the portfolio level. Consumer loan collateral
values are monitored on an ongoing basis.
For a description of the Companys loan portfolio and credit quality indicators utilized in its credit monitoring
process, see Note 8 to the Companys consolidated financial statements in the 2014 Form 10-K.
Loans considered as doubtful or loss are considered impaired. Substandard loans are regularly reviewed for
impairment. When a loan is impaired the impairment is measured based on the present value of expected future
cash flows discounted at the loans effective interest rate or as a practical expedient the observable market price
of the loan or the fair value of the collateral if the loan is collateral dependent. For further information, see
Note 2 to the Companys consolidated financial statements in the 2014 Form 10-K.
The following tables present credit quality indicators for the Companys loans held for investment, gross of
allowance for loan losses, by product type, at March 31, 2015 and December 31, 2014.
Corporate
Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special mention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,612
808
676
25
$17,372
$16,802
51
$5,265
$59,051
808
727
25
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,121
$17,372
$16,853
$5,265
$60,611
Corporate
Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special mention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,847
1,683
127
2
$16,576
$15,688
47
$5,298
$55,409
1,683
174
2
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,659
$16,576
$15,735
$5,298
$57,268
Total
Total
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
loan losses is maintained at a level reasonable to ensure that it can adequately absorb the estimated probable
losses inherent in the portfolio.
The specific allowance component of the allowance for loan losses is used to estimate probable losses for nonhomogeneous exposures, including loans modified in a Troubled Debt Restructuring (TDR), which have been
specifically identified for impairment analysis by the Company and determined to be impaired. At March 31,
2015 and December 31, 2014, the Companys TDRs were not significant. For further information on allowance
for loan losses, see Note 2 to the Companys consolidated financial statements in the 2014 Form 10-K.
The tables below provide details on impaired loans, past due loans and allowances for the Companys held for
investment loans:
Corporate
$23
2
25
2
Corporate
$
20
20
24
Loans by Region
2
2
2
Americas
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Past due 90 days loans and on nonaccrual . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans by Region
$ 22
26
131
Americas
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Past due 90 days loans and on nonaccrual . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 19
27
121
$
17
17
25
20
$23
22
45
26
Total
$
19
19
27
$ 23
29
Total
Total
$ 45
26
165
Total
$ 19
27
149
49
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The table below summarizes information about the allowance for loan losses, loans by impairment methodology,
the allowance for lending-related commitments and lending-related commitments by impairment methodology.
Corporate
Residential
Wholesale
Consumer Real Estate Real Estate
(dollars in millions)
Net recoveries . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (release) for loan losses(1) . . . . . . . . . . .
Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118
21
25
(11)
133
128
5
133
149
1
1
26
(11)
22
165
22
160
5
22
165
Total
$21,096
25
$17,372
$16,833
20
$5,265
$60,566
45
$21,121
$17,372
$16,853
$5,265
$60,611
2
1
149
37
(1)
185
185
185
147 $
36
(1)
182
182
182
$70,153
26
$ 3,875
287
$ 376
$74,691
26
$70,179
$ 3,875
287
$ 376
$74,717
(1)
(2)
(3)
(4)
The Company recorded a provision of $26 million for loan losses within Other revenues for the quarter ended March 31, 2015.
Amount includes the impact related to the transfer to loans held for sale and foreign currency translation adjustments.
Loan balances are gross of the allowance for loan losses and lending-related commitments are gross of credit losses.
The Company recorded a provision of $37 million for lending-related commitments within Other non-interest expenses for the quarter
ended March 31, 2015.
50
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Corporate
Residential
Wholesale
Consumer Real Estate Real Estate
(dollars in millions)
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . .
137
(33)
$
104
102
2
104
14
(3)
(3)
(3)
(29)
Total
156
(3)
13
124
13
122
2
13
124
$15,599
11
$12,638
$11,000
9
$2,442
$41,679
20
$15,610
$12,638
$11,009
$2,442
$41,699
125
19
127
19
144
146
144
146
144
146
$65,470
$ 2,865
$ 1,861
$ 238
$70,434
$65,470
$ 2,865
$ 1,861
$ 238
$70,434
(1) The Company recorded a release of $29 million for loan losses within Other revenues for the quarter ended March 31, 2014.
(2) Loan balances are gross of the allowance for loan losses and lending-related commitments are gross of credit losses.
(3) The Company recorded a provision of $19 million for lending-related commitments within Other non-interest expenses for the quarter
end March 31, 2014.
51
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Employee Loans.
Employee loans are granted primarily in conjunction with a program established in the Companys Wealth
Management business segment to retain and recruit certain employees. These loans are recorded in Customer and
other receivables in the Companys condensed consolidated statements of financial condition. These loans are
full recourse, generally require periodic payments and have repayment terms ranging from one to twelve years.
The Company establishes an allowance for loan amounts it does not consider recoverable, which is recorded in
Compensation and benefits expense. At March 31, 2015, the Company had $4,880 million of employee loans, net
of an allowance of approximately $112 million. At December 31, 2014, the Company had $5,130 million of
employee loans, net of an allowance of approximately $116 million.
The Company has also granted loans to other employees primarily in conjunction with certain after-tax leveraged
investment arrangements. At March 31, 2015, the balance of these loans was $21 million, net of an allowance of
approximately $41 million. At December 31, 2014, the balance of these loans was $40 million, net of an
allowance of approximately $42 million. The Company establishes an allowance for non-recourse loan amounts
not recoverable from employees, which is recorded in Other non-interest expense.
8.
Deposits.
$134,263
1,552
$132,159
1,385
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$135,815
$133,544
(1) Total deposits subject to the Federal Deposit Insurance Corporation (the FDIC) insurance at March 31, 2015 and December 31, 2014
were $101 billion and $99 billion, respectively.
(2) There were no significant non-interest bearing deposits at March 31, 2015 and December 31, 2014.
(3) Certain time deposit accounts are carried at fair value under the fair value option (see Note 3).
(4) The amount of U.S. time deposits that met or exceeded the FDIC insurance limit was not significant at March 31, 2015 and
December 31, 2014.
The weighted average interest rates of interest bearing deposits outstanding at March 31, 2015 and December 31,
2014 were 0.0% and 0.1%, respectively.
Interest-bearing deposits maturing over the next five years total: $135,807 million remaining in 2015, with no
other deposits maturing after 2015. The amount remaining for 2015 includes $134,255 million of saving deposits,
which have no stated maturity, and $1,552 million of time deposits.
The vast majority of deposits in the Companys U.S. Subsidiary Banks are sourced from the Companys retail
brokerage accounts. Concurrent with the acquisition of the remaining 35% stake in the purchase of the retail
securities joint venture between the Company and Citigroup Inc. (Citi) (the Wealth Management JV) in
2013, the deposit sweep agreement between Citi and the Company was terminated (see Note 3 to the
consolidated financial statements in the 2014 Form 10-K). During the quarter ended March 31, 2015, $4 billion
of deposits held by Citi relating to the Companys customer accounts were transferred to the Companys
depository institutions. At March 31, 2015, approximately $4 billion of additional deposits are scheduled to be
transferred to the Companys depository institutions on an agreed-upon basis through June 2015.
52
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
9.
Senior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$142,129
8,543
4,873
$139,565
8,339
4,868
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$155,545
$152,772
During the quarter ended March 31, 2015, the Company issued notes with a principal amount of approximately
$11.3 billion. During the quarter ended March 31, 2015, approximately $5.3 billion in aggregate long-term
borrowings matured or were retired.
The weighted average maturity of the Companys long-term borrowings, based upon stated maturity dates, was
approximately 6.3 years and 5.9 years at March 31, 2015 and December 31, 2014, respectively.
Other Secured Financings.
Other secured financings include the liabilities related to transfers of financial assets that are accounted for as
financings rather than sales, consolidated VIEs where the Company is deemed to be the primary beneficiary,
pledged commodities, certain equity-linked notes and other secured borrowings. See Note 6 for further
information on Other secured financings related to VIEs and securitization activities.
The Companys Other secured financings consisted of the following:
At
At
March 31, 2015 December 31, 2014
(dollars in millions)
$ 9,888
2,036
283
$10,346
1,395
344
Total(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,207
$12,085
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
positions in related securities and financial instruments, including a variety of derivative products (e.g., futures,
forwards, swaps and options). The Company manages the market risk associated with its trading activities on a
Company-wide basis, on a worldwide trading division level and on an individual product basis.
In connection with its derivative activities, the Company generally enters into master netting agreements and
collateral agreements with its counterparties. These agreements provide the Company with the right, in the event of
a default by the counterparty (such as bankruptcy or a failure to pay or perform), to net a counterpartys rights and
obligations under the agreement and to liquidate and set off collateral against any net amount owed by the
counterparty. However, in certain circumstances: The Company may not have such an agreement in place; the
relevant insolvency regime (which is based on the type of counterparty entity and the jurisdiction of organization of
the counterparty) may not support the enforceability of the agreement; or the Company may not have sought legal
advice to support the enforceability of the agreement. In cases where the Company has not determined an agreement
to be enforceable, the related amounts are not offset in the tabular disclosures below. The Companys policy is
generally to receive securities and cash posted as collateral (with rights of rehypothecation), irrespective of the
enforceability determination regarding the master netting and collateral agreement. In certain cases, the Company
may agree for such collateral to be posted to a third-party custodian under a control agreement that enables the
Company to take control of such collateral in the event of a counterparty default. The enforceability of the master
netting agreement is taken into account in the Companys risk management practices and application of
counterparty credit limits. The following tables present information about the offsetting of derivative instruments
and related collateral amounts. See information related to offsetting of certain collateralized transactions in Note 5.
At March 31, 2015
Offset in the
Net Amounts Amounts NotConsolidated
Amounts Offset Presented in the Condensed
Statements of Financial
in the Condensed Condensed
Condition(3)
Consolidated
Consolidated
Statements of
Statements of
Financial
Other
Gross
Financial
Financial
Instruments
Cash
Net
Amounts(1) Condition(2)
Condition
Collateral
Collateral Exposure
(dollars in millions)
Derivative assets
Bilateral OTC . . . . . . . . . . . . . . . . . $456,688
Cleared OTC(4) . . . . . . . . . . . . . . . 195,421
Exchange traded . . . . . . . . . . . . . . . 34,325
$(424,006)
(194,064)
(29,606)
$32,682
1,357
4,719
$ (9,809)
$ (55) $22,818
1,357
4,719
$(647,676)
$38,758
$ (9,809)
$ (55) $28,894
Derivative liabilities
Bilateral OTC . . . . . . . . . . . . . . . . . $442,056
Cleared OTC(4) . . . . . . . . . . . . . . . 188,423
Exchange traded . . . . . . . . . . . . . . . 35,108
$(400,689)
(188,115)
(29,606)
$41,367
308
5,502
$(15,267)
(643)
$(228) $25,872
308
4,859
$(618,410)
$47,177
$(15,910)
$(228) $31,039
(1) Amounts include $7.3 billion of derivative assets and $7.2 billion of derivative liabilities, which are either not subject to master netting
agreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally
enforceable. See also Fair Value and Notional of Derivative Instruments herein, for additional disclosure about gross fair values and
notionals for derivative instruments by risk type.
(2) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legally
enforceable in the event of default and where certain other criteria are met in accordance with applicable offsetting accounting guidance.
(3) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legally enforceable
in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting guidance.
(4) Amounts include OTC derivatives that are centrally cleared in accordance with certain regulatory requirements.
54
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
At December 31, 2014
Offset in the
Net Amounts Amounts NotConsolidated
Amounts Offset Presented in the Condensed
Statements of Financial
in the Condensed Condensed
Condition(3)
Consolidated
Consolidated
Statements of
Statements of
Financial
Other
Gross
Financial
Financial
Instruments
Cash
Net
Amounts(1) Condition(2)
Condition
Collateral
Collateral Exposure
(dollars in millions)
Derivative assets
Bilateral OTC . . . . . . . . . . . . . . . . . $427,079
Cleared OTC(4) . . . . . . . . . . . . . . . 217,169
Exchange traded . . . . . . . . . . . . . . . 32,123
$(396,582)
(215,576)
(27,819)
$30,497
1,593
4,304
$ (9,844)
$ (19) $20,634
1,593
4,304
$(639,977)
$36,394
$ (9,844)
$ (19) $26,531
Derivative liabilities
Bilateral OTC . . . . . . . . . . . . . . . . . $410,003
Cleared OTC(4) . . . . . . . . . . . . . . . 211,695
Exchange traded . . . . . . . . . . . . . . . 32,608
$(375,095)
(211,180)
(27,819)
$34,908
515
4,789
$(11,192)
(726)
$(179) $23,537
(6)
509
4,063
$(614,094)
$40,212
$(11,918)
$(185) $28,109
(1) Amounts include $6.5 billion of derivative assets and $6.9 billion of derivative liabilities, which are either not subject to master netting
agreements or collateral agreements or are subject to such agreements but the Company has not determined the agreements to be legally
enforceable. See also Fair Value and Notional of Derivative Instruments herein, for additional disclosure about gross fair values and
notionals for derivative instruments by risk type.
(2) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legally
enforceable in the event of default and where certain other criteria are met in accordance with applicable offsetting accounting guidance.
(3) Amounts relate to master netting agreements and collateral agreements, which have been determined by the Company to be legally
enforceable in the event of default but where certain other criteria are not met in accordance with applicable offsetting accounting
guidance.
(4) Amounts include OTC derivatives that are centrally cleared in accordance with certain regulatory requirements.
The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments
arises from the failure of a counterparty to perform according to the terms of the contract. The Companys
exposure to credit risk at any point in time is represented by the fair value of the derivative contracts reported as
assets. The fair value of a derivative represents the amount at which the derivative could be exchanged in an
orderly transaction between market participants and is further described in Note 2 to the consolidated financial
statements in the 2014 Form 10-K and Note 3.
55
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The tables below present a summary by counterparty credit rating and remaining contract maturity of the fair
value of OTC derivatives in a gain position at March 31, 2015 and December 31, 2014. Fair value is presented in
the final column, net of collateral received (principally cash and U.S. government and agency securities):
OTC Derivative ProductsTrading Assets at March 31, 2015(1)
Years to Maturity
Credit Rating(2)
Less
than 1
1-3
3-5
Cross-Maturity
and
Net Exposure
Cash Collateral
Post-cash
Net Exposure
Over 5
Netting(3)
Collateral
Post-collateral
(dollars in millions)
$ (5,161)
(18,070)
(47,540)
(18,737)
(5,689)
$ 1,054
7,168
12,212
8,887
4,663
865
5,086
8,105
6,361
3,758
$(95,197)
$33,984
$24,175
(1) Fair values shown represent the Companys net exposure to counterparties related to the Companys OTC derivative products. Amounts
include centrally cleared OTC derivatives. The table does not include exchange-traded derivatives and the effect of any related hedges
utilized by the Company.
(2) Obligor credit ratings are determined by the Companys Credit Risk Management Department.
(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories.
Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category,
where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.
Less
than 1
1-3
3-5
Cross-Maturity
and
Net Exposure
Cash Collateral
Post-cash
Net Exposure
Over 5
Netting(3)
Collateral
Post-collateral
(dollars in millions)
$ (5,009)
(15,415)
(43,644)
(15,844)
(5,727)
$ 1,330
6,916
10,475
8,752
4,598
$ 1,035
4,719
6,520
6,035
3,918
$(85,639)
$32,071
$22,227
(1) Fair values shown represent the Companys net exposure to counterparties related to the Companys OTC derivative products. Amounts
include centrally cleared OTC derivatives. The table does not include exchange-traded derivatives and the effect of any related hedges
utilized by the Company.
(2) Obligor credit ratings are determined by the Companys Credit Risk Management Department.
(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories.
Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category,
where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.
56
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Hedge Accounting.
The Company applies hedge accounting using various derivative financial instruments to hedge interest rate and
foreign exchange risk arising from assets and liabilities not held at fair value as part of asset and liability
management and foreign currency exposure management.
The Companys hedges are designated and qualify for accounting purposes as one of the following types of
hedges: hedges of exposure to changes in fair value of assets and liabilities being hedged (fair value hedges) and
hedges of net investments in foreign operations whose functional currency is different from the reporting
currency of the parent company (net investment hedges).
For all hedges where hedge accounting is being applied, effectiveness testing and other procedures to ensure the
ongoing validity of the hedges are performed at least monthly.
Fair Value HedgesInterest Rate Risk. The Companys designated fair value hedges consisted primarily of
interest rate swaps designated as fair value hedges of changes in the benchmark interest rate of fixed rate senior
long-term borrowings. The Company uses regression analysis to perform an ongoing prospective and
retrospective assessment of the effectiveness of these hedging relationships (i.e., the Company applies the longhaul method of hedge accounting). A hedging relationship is deemed effective if the fair values of the hedging
instrument (derivative) and the hedged item (debt liability) change inversely within a range of 80% to 125%. The
Company considers the impact of valuation adjustments related to the Companys own credit spreads and
counterparty credit spreads to determine whether they would cause the hedging relationship to be ineffective.
For qualifying fair value hedges of benchmark interest rates, the changes in the fair value of the derivative and
the changes in the fair value of the hedged liability provide offset of one another and, together with any resulting
ineffectiveness, are recorded in Interest expense. When a derivative is de-designated as a hedge, any basis
adjustment remaining on the hedged liability is amortized to Interest expense over the remaining life of the
liability using the effective interest method.
Net Investment Hedges. The Company may utilize forward foreign exchange contracts to manage the currency
exposure relating to its net investments in non-U.S. dollar functional currency operations. To the extent that the
notional amounts of the hedging instruments equal the portion of the investments being hedged and the
underlying exchange rate of the derivative hedging instrument relates to the exchange rate between the functional
currency of the investee and the parents functional currency, no hedge ineffectiveness is recognized in earnings.
If these exchange rates are not the same, the Company uses regression analysis to assess the prospective and
retrospective effectiveness of the hedge relationships and any ineffectiveness is recognized in Interest income.
The gain or loss from revaluing hedges of net investments in foreign operations at the spot rate is deferred and
reported within AOCI. The forward points on the hedging instruments are excluded from hedge effectiveness
testing and are recorded in Interest income.
57
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Fair Value and Notional of Derivative Instruments. The following tables summarize the fair value of
derivative instruments designated as accounting hedges and the fair value of derivative instruments not
designated as accounting hedges by type of derivative contract and the platform on which these instruments are
traded or cleared on a gross basis. Fair values of derivative contracts in an asset position are included in Trading
assets, and fair values of derivative contracts in a liability position are reflected in Trading liabilities in the
Companys condensed consolidated statements of financial condition (see Note 3):
Derivative Assets
at March 31, 2015
Bilateral
OTC
Derivatives designated as accounting
hedges:
Interest rate contracts . . . . . . . . . . . . . $
Foreign exchange contracts . . . . . . . .
Fair Value
Cleared Exchange
OTC(1) Traded
3,905 $
428
1,479 $
4,333
1,479
300,367
23,273
88,002
23,933
16,448
332
188,945
4,779
218
452,355
193,942
Notional
Bilateral
Cleared Exchange
Total
OTC
OTC(1)
Traded
(dollars in millions)
$
Total
5,384 $
428
43,242 $
8,556
36,388 $
79,630
8,556
5,812
51,798
36,388
425
135
27,441
6,324
489,737
28,052
88,355
51,374
22,772
332
4,694,122
733,081
2,328,794
314,360
104,164
8,994
7,792,382
172,179
15,930
1,434,961
16,422
278,570
103,889
13,921,465
905,260
2,361,146
592,930
208,053
8,994
34,325
680,622
8,183,515
7,980,491
1,833,842
17,997,848
88,186
Total derivatives . . . . . . . . . . . . . . . . . . . . $ 456,688 $ 195,421 $ 34,325 $ 686,434 $8,235,313 $8,016,879 $1,833,842 $18,086,034
Cash collateral netting . . . . . . . . . . . . . . . .
(64,030) (11,602)
(75,632)
58
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Derivative Liabilities
at March 31, 2015
Bilateral
OTC
Derivatives designated as accounting
hedges:
Interest rate contracts . . . . . . . . . . . . . $
Foreign exchange contracts . . . . . . . .
Fair Value
Cleared Exchange
OTC(1) Traded
14 $
16
12 $
2
30
14
284,618
23,646
88,343
31,029
14,306
84
183,798
4,417
194
442,026
188,409
Notional
Bilateral
Cleared Exchange
Total
OTC
OTC(1)
Traded
(dollars in millions)
$
26 $
18
2,585 $
2,601
2,677 $
209
44
5,186
2,886
249
84
28,350
6,425
468,665
28,063
88,621
59,379
20,731
84
4,521,135
656,892
1,956,212
351,276
88,889
7,117
7,483,783
151,893
12,189
1,643,379
19,856
290,911
84,604
13,648,297
808,785
1,988,257
642,187
173,493
7,117
35,108
665,543
7,581,521
7,647,865
2,038,750
17,268,136
(46,366)
Total
5,262
2,810
8,072
2,038,750 $17,276,208
(1) Amounts include OTC derivatives that are centrally cleared in accordance with certain regulatory requirements.
(2) Notional amounts include gross notionals related to open long and short futures contracts of $756 billion and $1,136 billion, respectively.
The unsettled fair value on these futures contracts (excluded from the table above) of $448 million and $20 million is included in
Customer and other receivables and Customer and other payables, respectively, in the Companys condensed consolidated statements of
financial condition.
Derivative Assets
at December 31, 2014
Bilateral
OTC
Derivatives designated as accounting
hedges:
Interest rate contracts . . . . . . . . . . . . . $
Foreign exchange contracts . . . . . . . .
Fair Value
Cleared Exchange
OTC(1) Traded
3,947 $
498
1,053 $
6
4,445
1,059
281,214
27,776
72,362
23,208
17,698
376
211,552
4,406
152
422,634
216,110
Notional
Bilateral
Cleared Exchange
Total
OTC
OTC(1)
Traded
(dollars in millions)
$
Total
5,000 $
504
44,324 $
9,362
27,692 $
261
72,016
9,623
5,504
53,686
27,953
407
83
24,916
6,717
493,173
32,182
72,597
48,124
24,415
376
4,854,953
806,441
1,955,343
299,363
115,792
5,179
9,187,454
167,390
11,538
1,467,056
9,663
271,164
156,440
15,509,463
973,831
1,976,544
570,527
272,232
5,179
32,123
670,867
8,037,071
9,366,382
1,904,323
19,307,776
81,639
Total derivatives . . . . . . . . . . . . . . . . . . . . $ 427,079 $ 217,169 $ 32,123 $ 676,371 $8,090,757 $9,394,335 $1,904,323 $19,389,415
Cash collateral netting . . . . . . . . . . . . . . . .
(58,541)
(4,654)
(63,195)
59
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Derivative Liabilities
at December 31, 2014
Bilateral
OTC
Derivatives designated as accounting
hedges:
Interest rate contracts . . . . . . . . . . . . . $
Foreign exchange contracts . . . . . . . .
Fair Value
Cleared Exchange
OTC(1) Traded
125 $
5
99 $
1
Notional
Bilateral
Cleared Exchange
Total
OTC
OTC(1)
Traded
(dollars in millions)
$
224 $
6
2,024 $
1,491
7,588 $
121
230
3,515
7,709
Total
9,612
1,612
130
100
264,579
28,165
72,156
30,061
14,740
172
207,482
3,944
169
293
21
25,511
6,783
472,354
32,109
72,346
55,572
21,523
172
4,615,886
714,181
1,947,178
339,884
93,019
5,478
9,138,417
154,054
11,477
1,714,021
1,761
302,205
132,136
15,468,324
868,235
1,960,416
642,089
225,155
5,478
409,873
211,595
32,608
654,076
7,715,626
9,303,948
2,150,123
19,169,697
11,224
Total derivatives . . . . . . . . . . . . . . . . . . . . $ 410,003 $ 211,695 $ 32,608 $ 654,306 $7,719,141 $9,311,657 $2,150,123 $19,180,921
Cash collateral netting . . . . . . . . . . . . . . . .
(37,054)
(258)
(37,312)
(1) Amounts include OTC derivatives that are centrally cleared in accordance with certain regulatory requirements.
(2) Notional amounts include gross notionals related to open long and short futures contracts of $685 billion and $1,122 billion, respectively.
The unsettled fair value on these futures contracts (excluded from the table above) of $472 million and $21 million is included in
Customer and other receivables and Customer and other payables, respectively, in the Companys condensed consolidated statements of
financial condition.
At March 31, 2015 and December 31, 2014, the amount of payables associated with cash collateral received that
was netted against derivative assets was $75.6 billion and $63.2 billion, respectively, and the amount of
receivables in respect of cash collateral paid that was netted against derivative liabilities was $46.4 billion and
$37.3 billion, respectively. Cash collateral receivables and payables of $15 million and $17 million, respectively,
at March 31, 2015 and $21 million and $30 million, respectively, at December 31, 2014, were not offset against
certain contracts that did not meet the definition of a derivative.
Derivatives Designated as Fair Value Hedges.
The following table presents gains (losses) reported on interest rate derivative instruments designated and
qualifying as accounting hedges and the related hedged item as well as the hedge ineffectiveness included in
Interest expense in the Companys condensed consolidated statements of income:
Gains (Losses) Recognized
Three Months Ended
March 31,
2015
2014
(dollars in millions)
Product Type
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
$ 758
(493)
$310
(8)
$ 265
$302
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Derivatives Designated as Net Investment Hedges
The following table presents gains (losses) reported on derivative instruments designated and qualifying as
accounting hedges:
Gains (Losses) Recognized in
OCI (effective portion)
Three Months Ended
March 31,
2015
2014
(dollars in millions)
Product Type
$262
$(67)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$262
$(67)
(1) Losses of $44 million and $45 million related to the forward points on the hedging instruments were excluded from hedge effectiveness
testing and recognized in interest income during the quarters ended March 31, 2015 and 2014, respectively.
The following table summarizes gains (losses) on derivative instruments not designated as accounting hedges:
Gains (Losses) Recognized in
Income(1)(2)
Three Months Ended
March 31,
2015
2014
(dollars in millions)
Product Type
$(1,718)
(245)
1,101
(1,066)
597
(82)
$(1,534)
158
1,017
75
525
99
$(1,413)
340
(1) Gains (losses) on derivative contracts not designated as hedges are primarily included in Trading revenues in the Companys condensed
consolidated statements of income.
(2) Gains (losses) associated with certain derivative contracts that have physically settled are excluded from the table above. Gains (losses)
on these contracts are reflected with the associated cash instruments, which are also included in Trading revenues in the Companys
condensed consolidated statements of income.
The Company also has certain embedded derivatives that have been bifurcated from the related structured
borrowings. Such derivatives are classified in Long-term borrowings and had a net fair value of $4 million and
$10 million at March 31, 2015 and December 31, 2014, respectively, and a notional value of $2,069 million at
both March 31, 2015 and December 31, 2014. The Company recognized losses of $5 million and $10 million
related to changes in the fair value of its bifurcated embedded derivatives for the quarters ended March 31, 2015
and 2014, respectively.
Credit Risk-Related Contingencies.
In connection with certain OTC trading agreements, the Company may be required to provide additional collateral
or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating
downgrade of the Company. At March 31, 2015, the aggregate fair value of OTC derivative contracts that contain
61
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
credit risk-related contingent features that are in a net liability position totaled $29,291 million, for which the
Company has posted collateral of $24,560 million, in the normal course of business. The additional collateral or
termination payments which may be called in the event of a future credit rating downgrade vary by contract and
can be based on ratings by either or both of Moodys Investors Service, Inc. (Moodys) and Standard & Poors
Ratings Services (S&P). At March 31, 2015, for such OTC trading agreements, the future potential collateral
amounts and termination payments that could be called or required by counterparties or exchange and clearing
organizations in the event of one-notch or two-notch downgrade scenarios based on the relevant contractual
downgrade triggers were $1,610 million and an incremental $2,838 million, respectively. Of these amounts,
$3,218 million at March 31, 2015 related to bilateral arrangements between the Company and other parties where
upon the downgrade of one party, the downgraded party must deliver collateral to the other party. These bilateral
downgrade arrangements are a risk management tool used extensively by the Company as credit exposures are
reduced if counterparties are downgraded.
Credit Derivatives and Other Credit Contracts.
The Company enters into credit derivatives, principally through credit default swaps, under which it receives or
provides protection against the risk of default on a set of debt obligations issued by a specified reference entity or
entities. A majority of the Companys counterparties are banks, broker-dealers, insurance and other financial
institutions, and monoline insurers.
The tables below summarize the notional and fair value of protection sold and protection purchased through
credit default swaps at March 31, 2015 and December 31, 2014:
At March 31, 2015
Maximum Potential Payout/Notional
Protection Sold
Protection Purchased
Fair Value
Fair Value
Notional
(Asset)/Liability
Notional
(Asset)/Liability
(dollars in millions)
$487,250
265,574
88,653
$(3,914)
(2,561)
(2,451)
$464,368
225,875
182,325
$3,149
2,242
3,546
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$841,477
$(8,926)
$872,568
$8,937
$535,415
276,465
96,182
$(2,479)
(1,777)
(2,355)
$509,872
229,789
194,343
$1,641
1,563
3,334
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$908,062
$(6,611)
$934,004
$6,538
62
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The tables below summarize the credit ratings and maturities of protection sold through credit default swaps and
other credit contracts at March 31, 2015 and December 31, 2014:
Total
100,594
251,458
15,102
4,873
15,278
25,055
42,598
500
5,270
31,064
78,768
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,308
158,200
(3,914)
6,771
64,471
500
13,279
67
23,489
35,237 26,319 107,898
32,001 22,045 157,869
(1,240)
(1)
(605)
(1,708)
(1,458)
87,288
354,227
(5,012)
Total credit default swaps sold . . . . . . . . . . . . . . $160,902 $409,658 $198,388 $72,529 $841,477
$(8,926)
612 $ 1,133
$ (930)
$(9,856)
476 $
24,098
$ (302)
(494)
(1,337)
(2,694)
913
487,250
45 $
111,100
Fair Value
(Asset)/
Liability(1)(2)
48,431
$
(1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.
(2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit
spreads of the underlying reference entity or entities tightened during the term of the contracts.
(3) Other credit contracts include CLNs, CDOs and credit default swaps that are considered hybrid instruments.
(4) Fair value amounts shown represent the fair value of the hybrid instruments.
63
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Total
112,730
265,842
17,625
704
1,283
30,265
25,750
31,124
6,512
6,841
40,575
88,105
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,627
173,157
132,639
$ (113)
(688)
(1,962)
(1,489)
1,773
535,415
(2,479)
7,265
1,883
57,897
716
2,864
10,796
10,154
30
18,308
60,141
7,730 138,711
22,971 10,109 146,935
(985)
(270)
(465)
(2,904)
492
372,647
(4,132)
Total credit default swaps sold . . . . . . . . . . . . . . $188,357 $438,999 $233,886 $46,820 $908,062
$(6,611)
620 $ 1,211
$ (500)
$(7,111)
51 $
539 $
101,247
24,204
Fair Value
(Asset)/
Liability(1)(2)
1 $
22,616
(1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.
(2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit
spreads of the underlying reference entity or entities tightened during the term of the contracts.
(3) Other credit contracts include CLNs, CDOs and credit default swaps that are considered hybrid instruments.
(4) Fair value amounts shown represent the fair value of the hybrid instruments.
Single Name Credit Default Swaps. A credit default swap protects the buyer against the loss of principal on a
bond or loan in case of a default by the issuer. The protection buyer pays a periodic premium (generally
quarterly) over the life of the contract and is protected for the period. The Company in turn will have to perform
under a credit default swap if a credit event as defined under the contract occurs. Typical credit events include
bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations
of the referenced entity. In order to provide an indication of the current payment status or performance risk of the
credit default swaps, a breakdown by credit ratings is provided. Agency ratings, if available, are used for this
purpose; otherwise the Companys internal ratings are used.
Index and Basket Credit Default Swaps. Index and basket credit default swaps are products where credit
protection is provided on a portfolio of single name credit default swaps. Generally, in the event of a default on
one of the underlying names, the Company will have to pay a pro rata portion of the total notional amount of the
credit default swap.
The Company also enters into tranched index and basket credit default swaps where credit protection is provided
on a particular portion of the portfolio loss distribution. The most junior tranches cover initial defaults, and once
losses exceed the notional of the tranche, they are passed on to the next most senior tranche in the capital
structure.
64
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
In order to provide an indication of the current payment status or performance risk of the credit default swaps, a
breakdown by the Companys internal credit ratings is provided. Effective January 1, 2015, the Company utilized
its internal credit ratings as compared with December 31, 2014 where external agency ratings, if available, were
utilized. The change in the rating methodology did not have a significant impact on investment grade versus noninvestment grade classifications or the fair values of tranched and non-tranched index and basket products in the
above table.
Credit Protection Sold through CLNs and CDOs. The Company has invested in CLNs and CDOs, which are
hybrid instruments containing embedded derivatives, in which credit protection has been sold to the issuer of the
note. If there is a credit event of a reference entity underlying the instrument, the principal balance of the note
may not be repaid in full to the Company.
Purchased Credit Protection with Identical Underlying Reference Obligations. For single name credit default
swaps and non-tranched index and basket credit default swaps, the Company has purchased protection with a
notional amount of approximately $687 billion and $731 billion at March 31, 2015 and December 31, 2014,
respectively, compared with a notional amount of approximately $751 billion and $805 billion at March 31, 2015
and December 31, 2014, respectively, of credit protection sold with identical underlying reference obligations. In
order to identify purchased protection with the same underlying reference obligations, the notional amount for
individual reference obligations within non-tranched indices and baskets was determined on a pro rata basis and
matched off against single name and non-tranched index and basket credit default swaps where credit protection
was sold with identical underlying reference obligations.
The purchase of credit protection does not represent the sole manner in which the Company risk manages its
exposure to credit derivatives. The Company manages its exposure to these derivative contracts through a variety
of risk mitigation strategies, which include managing the credit and correlation risk across single name, nontranched indices and baskets, tranched indices and baskets, and cash positions. Aggregate market risk limits have
been established for credit derivatives, and market risk measures are routinely monitored against these limits.
The Company may also recover amounts on the underlying reference obligation delivered to the Company under
credit default swaps where credit protection was sold.
65
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
11. Commitments, Guarantees and Contingencies.
Commitments.
The Companys commitments associated with outstanding letters of credit and other financial guarantees
obtained to satisfy collateral requirements, investment activities, corporate lending and financing arrangements,
and mortgage lending at March 31, 2015 are summarized below by period of expiration. Since commitments
associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual
future cash funding requirements:
Years to Maturity
Less
than 1
1-3
3-5
Over 5
(dollars in millions)
$76,456
$21,909
$48,921
$7,346
Total at
March 31, 2015
309
1,047
64,441
24,627
121
2,271
55,117
627
6,072
$154,632
(1) Total amount includes $54.6 billion of investment grade and $13.2 billion of non-investment grade unfunded commitments accounted for
as held for investment and $8.3 billion of investment grade and $10.5 billion of non-investment grade unfunded commitments accounted
for as held for sale at March 31, 2015. The remainder of these lending commitments is carried at fair value.
(2) These commitments are recorded at fair value within Trading assets and Trading liabilities in the Companys condensed consolidated
statements of financial condition (see Note 3).
(3) The Company enters into forward starting reverse repurchase and securities borrowing agreements (agreements that have a trade date at
or prior to March 31, 2015 and settle subsequent to period-end) that are primarily secured by collateral from U.S. government agency
securities and other sovereign government obligations. These agreements primarily settle within three business days of the trade date, and
of the total amount at March 31, 2015, $47.4 billion settled within three business days.
(4) The Company also has a contingent obligation to provide financing to a clearinghouse through which it clears certain transactions. The
financing is required only upon the default of a clearinghouse member. The financing takes the form of a reverse repurchase facility, with
a maximum amount of approximately $0.5 billion.
For a further description of these commitments, refer to Note 13 to the Companys consolidated financial
statements in the 2014 Form 10-K.
The Company sponsors several non-consolidated investment funds for third-party investors where the Company
typically acts as general partner of, and investment advisor to, these funds and typically commits to invest a
minority of the capital of such funds, with subscribing third-party investors contributing the majority. The
Companys employees, including its senior officers, as well as the Companys Directors, may participate on the
same terms and conditions as other investors in certain of these funds that the Company forms primarily for
client investment, except that the Company may waive or lower applicable fees and charges for its
66
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
employees. The Company has contractual capital commitments, guarantees, lending facilities and counterparty
arrangements with respect to these investment funds.
Guarantees.
The table below summarizes certain information regarding the Companys obligations under guarantee
arrangements at March 31, 2015:
Type of Guarantee
Carrying
Amount
(Asset)/ Collateral/
Liability Recourse
612
1,133
(930)
2,811
(5) 4,420
Whole loan sales guarantees . . . . . . . . .
23,560
23,560
8
64,550
64,550
97
(1) Carrying amounts of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further
information on derivative contracts, see Note 10.
(2) Approximately $2.2 billion of standby letters of credit are also reflected in the Commitments table above in primary and secondary
lending commitments. Standby letters of credit are recorded at fair value within Trading assets or Trading liabilities in the Companys
condensed consolidated statements of financial condition.
For a further description of these guarantees, refer to Note 13 to the Companys consolidated financial statements
in the 2014 Form 10-K.
The Company has obligations under certain guarantee arrangements, including contracts and indemnification
agreements, that contingently require a guarantor to make payments to the guaranteed party based on changes in
an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index, or
the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a
guaranteed party. Also included as guarantees are contracts that contingently require the guarantor to make
payments to the guaranteed party based on another entitys failure to perform under an agreement, as well as
indirect guarantees of the indebtedness of others. The Companys use of guarantees is described below by type of
guarantee:
Other Guarantees and Indemnities.
In the normal course of business, the Company provides guarantees and indemnifications in a variety of
commercial transactions. These provisions generally are standard contractual terms. Certain of these guarantees
and indemnifications are described below.
Trust Preferred Securities. The Company has established Morgan Stanley Capital Trusts for the limited
purpose of issuing trust preferred securities to third parties and lending such proceeds to the Company in
67
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
exchange for junior subordinated debentures. The Morgan Stanley Capital Trusts are special purpose
entities and only the Parent provides a guarantee for the trust preferred securities. The Company has
directly guaranteed the repayment of the trust preferred securities to the holders in accordance with the
terms thereof. See Note 11 to the Companys consolidated financial statements in the 2014 Form 10-K for
details on the Companys junior subordinated debentures.
Indemnities. The Company provides standard indemnities to counterparties for certain contingent
exposures and taxes, including U.S. and foreign withholding taxes, on interest and other payments made
on derivatives, securities and stock lending transactions, certain annuity products and other financial
arrangements. These indemnity payments could be required based on a change in the tax laws, a change
in interpretation of applicable tax rulings or a change in factual circumstances. Certain contracts contain
provisions that enable the Company to terminate the agreement upon the occurrence of such events. The
maximum potential amount of future payments that the Company could be required to make under these
indemnifications cannot be estimated.
Exchange/Clearinghouse Member Guarantees. The Company is a member of various U.S. and non-U.S.
exchanges and clearinghouses that trade and clear securities and/or derivative contracts. Associated with
its membership, the Company may be required to pay a proportionate share of the financial obligations of
another member who may default on its obligations to the exchange or the clearinghouse. While the rules
governing different exchange or clearinghouse memberships vary, in general the Companys obligations
under these rules would arise only if the exchange or clearinghouse had previously exhausted its
resources. In addition, some clearinghouse rules require members to assume a proportionate share of
losses resulting from the clearinghouses investment of guarantee fund contributions and initial margin,
and of other losses unrelated to the default of a clearing member, if such losses exceed the specified
resources allocated for such purpose by the clearinghouse. The maximum potential payout under these
rules cannot be estimated. The Company has not recorded any contingent liability in its condensed
consolidated financial statements for these agreements and believes that any potential requirement to
make payments under these agreements is remote.
Merger and Acquisition Guarantees. The Company may, from time to time, in its role as investment
banking advisor be required to provide guarantees in connection with certain European merger and
acquisition transactions. If required by the regulating authorities, the Company provides a guarantee that
the acquirer in the merger and acquisition transaction has or will have sufficient funds to complete the
transaction and would then be required to make the acquisition payments in the event the acquirers funds
are insufficient at the completion date of the transaction. These arrangements generally cover the time
frame from the transaction offer date to its closing date and, therefore, are generally short term in nature.
The maximum potential amount of future payments that the Company could be required to make cannot
be estimated. The Company believes the likelihood of any payment by the Company under these
arrangements is remote given the level of the Companys due diligence associated with its role as
investment banking advisor.
In the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (including
obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities)
of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or
trading counterparties. The activities of the Companys subsidiaries covered by these guarantees (including any
related debt or trading obligations) are included in the Companys condensed consolidated financial statements.
68
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Contingencies.
Legal. In the normal course of business, the Company has been named, from time to time, as a defendant in
various legal actions, including arbitrations, class actions and other litigation, arising in connection with its
activities as a global diversified financial services institution. Certain of the actual or threatened legal actions
include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of
damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt
or are in financial distress. These actions have included, but are not limited to, residential mortgage and credit
crisis related matters. Over the last several years, the level of litigation and investigatory activity (both formal
and informal) by governmental and self-regulatory agencies has increased materially in the financial services
industry. As a result, the Company expects that it may become the subject of increased claims for damages and
other relief and, while the Company has identified below any individual proceedings where the Company
believes a material loss to be reasonably possible and reasonably estimable, there can be no assurance that
material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be
probable or possible and reasonably estimable losses.
The Company contests liability and/or the amount of damages as appropriate in each pending matter. Where
available information indicates that it is probable a liability had been incurred at the date of the consolidated
financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the
estimated loss by a charge to income. The Company expects future litigation accruals in general to continue to be
elevated and the changes in accruals from period to period may fluctuate significantly, given the current
environment regarding government investigations and private litigation affecting global financial services firms,
including the Company.
In many proceedings and investigations, however, it is inherently difficult to determine whether any loss is
probable or even possible or to estimate the amount of any loss. In addition, even where loss is possible or an
exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss
contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal proceedings and investigations, the Company cannot reasonably estimate such losses,
particularly for proceedings and investigations where the factual record is being developed or contested or where
plaintiffs or governmental entities seek substantial or indeterminate damages, restitution, disgorgement or
penalties. Numerous issues may need to be resolved, including through potentially lengthy discovery and
determination of important factual matters, determination of issues related to class certification and the
calculation of damages or other relief, and by addressing novel or unsettled legal questions relevant to the
proceedings or investigations in question, before a loss or additional loss or range of loss or additional loss can be
reasonably estimated for a proceeding or investigation.
For certain other legal proceedings and investigations, the Company can estimate reasonably possible losses,
additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but does not believe,
based on current knowledge and after consultation with counsel, that such losses will have a material adverse
effect on the Companys consolidated financial statements as a whole, other than the matters referred to in the
following paragraphs.
On July 15, 2010, China Development Industrial Bank (CDIB) filed a complaint against the Company, styled
China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the
Supreme Court of the State of New York, New York County (Supreme Court of NY). The complaint relates to
a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The
complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges
69
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
that the Company misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Company knew
that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The
complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has
already lost under the credit default swap, rescission of CDIBs obligation to pay an additional $12 million,
punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Companys motion
to dismiss the complaint. Based on currently available information, the Company believes it could incur a loss of
up to approximately $240 million plus pre- and post-judgment interest, fees and costs.
On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a
complaint against the Company and other defendants in the Court of Common Pleas in Ohio, styled Western and
Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint
was filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the sale
to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential
mortgage loans. The amount of the certificates allegedly sold to plaintiffs by the Company was approximately
$153 million. The amended complaint raises claims under the Ohio Securities Act, federal securities laws, and
common law and seeks, among other things, to rescind the plaintiffs purchases of such certificates. The
Company filed its answer on August 17, 2012. The Company filed a motion for summary judgment on
January 20, 2015. Trial is currently scheduled to begin in July 2015. At March 25, 2015, the current unpaid
balance of the mortgage pass-through certificates at issue in this action was approximately $108 million, and the
certificates had incurred actual losses of approximately $2 million. Based on currently available information, the
Company believes it could incur a loss in this action up to the difference between the $108 million unpaid
balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment
against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be
entitled to an offset for interest received by the plaintiff prior to a judgment.
On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against
the Company and certain affiliates in the Superior Court of the State of New Jersey, styled The Prudential
Insurance Company of America, et al. v. Morgan Stanley, et al. On October 16, 2012, plaintiffs filed an amended
complaint, which alleges that defendants made untrue statements and material omissions in connection with the
sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing
residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the
Company is approximately $1.073 billion. The amended complaint raises claims under the New Jersey Uniform
Securities Law, as well as common law claims of negligent misrepresentation, fraud, fraudulent inducement,
equitable fraud, aiding and abetting fraud, and violations of the New Jersey RICO statute, and includes a claim
for treble damages. On April 26, 2013, the defendants filed an answer to the amended complaint. On January 2,
2015, the court denied defendants renewed motion to dismiss the amended complaint. At March 25, 2015, the
current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $598
million, and the certificates had not yet incurred actual losses. Based on currently available information, the
Company believes it could incur a loss in this action up to the difference between the $598 million unpaid
balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment
against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be
entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a
judgment.
On August 7, 2012, U.S. Bank, in its capacity as Trustee, filed a complaint on behalf of Morgan Stanley
Mortgage Loan Trust 2006-4SL and Mortgage Pass-Through Certificates, Series 2006-4SL (together, the
Trust) against the Company. The matter is styled Morgan Stanley Mortgage Loan Trust 2006-4SL, et al. v.
Morgan Stanley Mortgage Capital Inc. and is pending in the Supreme Court of NY. The complaint asserts claims
70
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal
balance of approximately $303 million, breached various representations and warranties. The complaint seeks,
among other relief, rescission of the mortgage loan purchase agreement underlying the transaction, specific
performance and unspecified damages and interest. On August 8, 2014, the court granted in part and denied in
part the Companys motion to dismiss. On September 3, 2014, the Company filed its answer to the complaint.
Based on currently available information, the Company believes that it could incur a loss in this action of up to
approximately $149 million, plus pre- and post-judgment interest, fees and costs.
On August 8, 2012, U.S. Bank, in its capacity as Trustee, filed a complaint on behalf of Morgan Stanley
Mortgage Loan Trust 2006-14SL, Mortgage Pass-Through Certificates, Series 2006-14SL, Morgan Stanley
Mortgage Loan Trust 2007-4SL and Mortgage Pass-Through Certificates, Series 2007-4SL against the Company.
The complaint is styled Morgan Stanley Mortgage Loan Trust 2006-14SL, et al. v. Morgan Stanley Mortgage
Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc. and is pending in the
Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among other things, that
the loans in the trusts, which had original principal balances of approximately $354 million and $305 million
respectively, breached various representations and warranties. On August 16, 2013, the court granted in part and
denied in part the Companys motion to dismiss the complaint. On September 17, 2013, the Company filed its
answer to the complaint. On September 26, 2013, and October 7, 2013, the Company and the plaintiffs,
respectively, filed notices of appeal with respect to the courts August 16, 2013 decision. The plaintiff is seeking,
among other relief, rescission of the mortgage loan purchase agreements underlying the transactions, specific
performance and unspecified damages and interest. Based on currently available information, the Company
believes that it could incur a loss in this action of up to approximately $527 million, plus pre- and post-interest,
fees and costs.
On September 28, 2012, U.S. Bank, in its capacity as Trustee, filed a complaint on behalf of Morgan Stanley
Mortgage Loan Trust 2006-13ARX against the Company styled Morgan Stanley Mortgage Loan
Trust 2006-13ARX v. Morgan Stanley Mortgage Capital Holdings LLC, as successor in interest to Morgan
Stanley Mortgage Capital Inc., pending in the Supreme Court of NY. U.S. Bank filed an amended complaint on
January 17, 2013, which asserts claims for breach of contract and alleges, among other things, that the loans in
the trust, which had an original principal balance of approximately $609 million, breached various
representations and warranties. The amended complaint seeks, among other relief, declaratory judgment relief,
specific performance and unspecified damages and interest. On September 25, 2014, the court granted in part and
denied in part the Companys motion to dismiss. Based on currently available information, the Company believes
that it could incur a loss in this action of up to approximately $173 million, plus pre- and post-judgment interest,
fees and costs.
On January 10, 2013, U.S. Bank, in its capacity as Trustee, filed a complaint on behalf of Morgan Stanley
Mortgage Loan Trust 2006-10SL and Mortgage Pass-Through Certificates, Series 2006-10SL against the
Company. The complaint is styled Morgan Stanley Mortgage Loan Trust 2006-10SL, et al. v. Morgan Stanley
Mortgage Capital Holdings LLC, as successor in interest to Morgan Stanley Mortgage Capital Inc. and is
pending in the Supreme Court of NY. The complaint asserts claims for breach of contract and alleges, among
other things, that the loans in the trust, which had an original principal balance of approximately $300 million,
breached various representations and warranties. The complaint seeks, among other relief, an order requiring the
Company to comply with the loan breach remedy procedures in the transaction documents, unspecified damages,
and interest. On August 8, 2014, the court granted in part and denied in part the Companys motion to dismiss.
On September 3, 2014, the Company filed its answer to the complaint. Based on currently available information,
the Company believes that it could incur a loss in this action of up to approximately $197 million, plus pre- and
post-judgment interest, fees and costs.
71
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a
complaint against the Company, certain affiliates, and other defendants in the Supreme Court of NY. The
complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of
certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans.
The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiff was
approximately $694 million. The complaint alleges causes of action against the Company for common law fraud,
fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among
other things, compensatory and punitive damages. On June 10, 2014, the court denied defendants motion to
dismiss. On August 4, 2014, claims regarding two certificates were dismissed by stipulation. After these
dismissals, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the
Company was approximately $644 million. On September 12, 2014, the Company filed a notice of appeal from
the denial of the motion to dismiss. On January 12, 2015, the Company filed an amended answer to the
complaint. At March 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in
this action was approximately $289 million, and the certificates had incurred actual losses of approximately $79
million. Based on currently available information, the Company believes it could incur a loss in this action up to
the difference between the $289 million unpaid balance of these certificates (plus any losses incurred) and their
fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment
interest, fees and costs. The Company may be entitled to be indemnified for some of these losses.
On September 23, 2013, the plaintiff in National Credit Union Administration Board v. Morgan Stanley & Co.
Inc., et al. filed a complaint against the Company and certain affiliates in the United States District Court for the
Southern District of New York (SDNY). The complaint alleges that defendants made untrue statements of
material fact or omitted to state material facts in the sale to the plaintiff of certain mortgage pass-through
certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates
allegedly sponsored, underwritten and/or sold by the Company to plaintiffs was approximately $417 million. The
complaint alleges causes of action against the Company for violations of Section 11 and Section 12(a)(2) of the
Securities Act of 1933, violations of the Texas Securities Act, and violations of the Illinois Securities Law of
1953 and seeks, among other things, rescissory and compensatory damages. On January 22, 2014 the court
granted defendants motion to dismiss with respect to claims arising under the Securities Act of 1933 and denied
defendants motion to dismiss with respect to claims arising under Texas Securities Act and the Illinois Securities
Law of 1953. On November 17, 2014, the plaintiff filed an amended complaint. On December 15, 2014,
defendants answered the amended complaint. At March 25, 2015, the current unpaid balance of the mortgage
pass-through certificates at issue in this action was approximately $204 million, and the certificates had incurred
actual losses of $28 million. Based on currently available information, the Company believes it could incur a loss
in this action up to the difference between the $204 million unpaid balance of these certificates (plus any losses
incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and
post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses
and to an offset for interest received by the plaintiff prior to a judgment.
On April 28, 2014, Deutsche Bank National Trust Company, in its capacity as trustee for Morgan Stanley
Structured Trust I 2007-1, filed a complaint against the Company. The matter is styled Deutsche Bank National
Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC and is pending in the SDNY. The complaint
asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an
original principal balance of approximately $735 million, breached various representations and warranties. The
complaint seeks, among other relief, specific performance of the loan breach remedy procedures in the
transaction documents, unspecified compensatory and/or rescissory damages, interest and costs. On April 3,
2015, the court granted in part and denied in part the Companys motion to dismiss. On April 17, 2015, the
72
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Company filed its answer to the complaint. Based on currently available information, the Company believes that
it could incur a loss in this action of up to approximately $292 million, plus pre- and post-judgment interest, fees
and costs.
12. Regulatory Requirements.
Regulatory Capital Framework. The Company is a financial holding company under the Bank Holding
Company Act of 1956, as amended, and is subject to the regulation and oversight of the Federal Reserve. The
Federal Reserve establishes capital requirements for the Company, including well-capitalized standards, and
evaluates the Companys compliance with such capital requirements. The Office of the Comptroller of the
Currency (OCC) establishes similar capital requirements and standards for the Companys U.S. bank operating
subsidiaries MSBNA and MSPBNA (U.S. Subsidiary Banks). The U.S. banking regulators have
comprehensively revised their risk-based and leverage capital framework to implement many aspects of the Basel
III capital standards established by the Basel Committee. The U.S. banking regulators revised capital framework
is referred to herein as U.S. Basel III. The Company and its U.S. Subsidiary Banks became subject to U.S.
Basel III on January 1, 2014.
Calculation of Risk-Based Capital Ratios. The Company is required to calculate and hold capital against
credit, market and operational risk-weighted assets (RWAs). RWAs reflect both on- and off-balance sheet risk
of the Company. Credit risk RWAs reflect capital charges attributable to the risk of loss arising from a borrower
or counterparty failing to meet its financial obligations. Market risk RWAs reflect capital charges attributable to
the risk of loss resulting from adverse changes in market prices and other factors. Operational risk RWAs reflect
capital charges attributable to the risk of loss resulting from inadequate or failed processes, people and systems or
from external events (e.g., fraud, theft, legal and compliance risks or damage to physical assets).
On February 21, 2014, the Federal Reserve and the OCC approved the Companys and its U.S. Subsidiary
Banks respective use of the U.S. Basel III advanced internal ratings-based approach for determining credit risk
capital requirements and advanced measurement approaches for determining operational risk capital
requirements to calculate and publicly disclose their risk-based capital ratios beginning with the second quarter
of 2014, subject to the capital floor discussed below (the Advanced Approach). As an Advanced Approach
banking organization, the Company is required to compute risk-based capital ratios using both (i) standardized
approaches for calculating credit risk RWAs and market risk RWAs (the Standardized Approach); and (ii) an
advanced internal ratings-based approach for calculating credit risk RWAs, an advanced measurement approach
for calculating operational risk RWAs, and an advanced approach for calculating market risk RWAs under U.S.
Basel III.
To implement a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, U.S. Basel III
subjects Advanced Approach banking organizations that have been approved by their regulators to exit the
parallel run, such as the Company, to a permanent capital floor. Beginning on January 1, 2015, the Companys
binding risk-based capital ratios are the lower of the capital ratios computed under the Advanced Approach or the
Standardized Approach under U.S. Basel III. The U.S. Basel III Standardized Approach modifies certain U.S.
Basel I-based methods for calculating RWAs and prescribes new standardized risk weights for certain types of
assets and exposures. In 2014, as a result of the capital floor, an Advanced Approach banking organizations
binding risk-based capital ratios were the lower of its ratios computed under the Advanced Approach or U.S.
banking regulators U.S. Basel I-based rules (U.S. Basel I) as supplemented by rules that implemented the
Basel Committees market risk capital framework amendment, commonly referred to as Basel 2.5. The capital
floor applies to the calculation of the minimum risk-based capital requirements as well as the capital conservation
buffer, the countercyclical capital buffer (if deployed by banking regulators), and, if adopted, the proposed global
systemically important bank (G-SIB) buffer.
73
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The methods for calculating each of the Companys risk-based capital ratios will change through January 1, 2022
as U.S. Basel IIIs revisions to the numerator and denominator are phased in and as the Company calculates
RWAs using the Advanced Approach and the Standardized Approach. These ongoing methodological changes
may result in differences in the Companys reported capital ratios from one reporting period to the next that are
independent of changes to the Companys capital base, asset composition, off-balance sheet exposures or risk
profile.
The Companys Regulatory Capital and Capital Ratios. Beginning on January 1, 2015, the Companys and its
U.S. Subsidiary Banks risk-based capital ratios for regulatory purposes are the lower of each ratio calculated
using RWAs under the Advanced Approach or the Standardized Approach under U.S. Basel III, in both cases
subject to transitional provisions. At March 31, 2015, the Companys risk-based capital ratios were lower under
the Advanced Approach transitional rules; however, the risk-based capital ratios for its U.S. Subsidiary Banks
were lower under the Standardized Approach transitional rules.
The following table presents the Companys capital measures under the U.S. Basel III Advanced Approach
transitional rules and the minimum regulatory capital ratios.
Amount
$ 57,342
64,746
76,924
13.1%
14.7%
17.5%
7.8%
Assets:
RWAs . . . . . . . . . . . . . . . . . . . . .
Adjusted average assets(2) . . . . .
$438,964
827,054
N/A
N/A
4.5%
6.0%
8.0%
4.0%
N/A
N/A
$ 57,324
64,182
74,972
12.6%
14.1%
16.4%
7.9%
$456,008
810,524
N/A
N/A
4.0%
5.5%
8.0%
4.0%
N/A
N/A
N/ANot Applicable.
(1) Percentages represent minimum regulatory capital ratios under U.S. Basel III transitional rules.
(2) In accordance with U.S. Basel III, adjusted average assets represent the denominator of the Tier 1 leverage ratio and were composed of
the Companys average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter, adjusted for
disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain financial equity investments and other adjustments.
The Companys U.S. Subsidiary Banks. The Companys U.S. Subsidiary Banks are subject to similar regulatory
capital requirements as the Company. Failure to meet minimum capital requirements can initiate certain
mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Companys U.S. Subsidiary Banks financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, each of the Companys U.S. Subsidiary Banks must meet specific
capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices.
74
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The following table sets forth the capital information for MSBNA:
At March 31, 2015
At December 31, 2014
U.S. Basel III
U.S. Basel III
Transitional/
Transitional/
Standardized Approach
Basel I + Basel 2.5 Approach
Required
Required
Amount
Ratio
Capital Ratio(1)
Amount
Ratio
Capital Ratio(1)
(dollars in millions)
$12,861
12,861
14,572
12,861
14.1%
14.1%
16.0%
10.2%
6.5%
8.0%
10.0%
5.0%
$12,355
12,355
14,040
12,355
12.2%
12.2%
13.9%
10.2%
6.5%
8.0%
10.0%
5.0%
(1) Capital ratios required to be considered well-capitalized for U.S. regulatory purposes.
The following table sets forth the capital information for MSPBNA:
At March 31, 2015
At December 31, 2014
U.S. Basel III
U.S. Basel III
Transitional/
Transitional/
Standardized Approach
Basel I + Basel 2.5 Approach
Required
Required
Amount
Ratio
Capital Ratio(1)
Amount
Ratio
Capital Ratio(1)
(dollars in millions)
$2,821
2,821
2,832
2,821
22.3%
22.3%
22.4%
10.0%
6.5%
8.0%
10.0%
5.0%
$2,468
2,468
2,480
2,468
20.3%
20.3%
20.4%
9.4%
6.5%
8.0%
10.0%
5.0%
(1) Capital ratios required to be considered well-capitalized for U.S. regulatory purposes.
Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions,
in order to be considered well-capitalized, must maintain certain minimum capital ratios. Each U.S. depository
institution subsidiary of the Company must be well-capitalized in order for the Company to continue to qualify as
a financial holding company and to continue to engage in the broadest range of financial activities permitted for
financial holding companies. At March 31, 2015 and December 31, 2014, the Companys U.S. Subsidiary Banks
maintained capital at levels in excess of the universally mandated well-capitalized requirements. The Companys
U.S. Subsidiary Banks maintained capital at levels sufficiently in excess of these well capitalized requirements
to address any additional capital needs and requirements identified by the U.S. federal banking regulators.
MS&Co. and Other Broker-Dealers. MS&Co. is a registered broker-dealer and registered futures commission
merchant and, accordingly, is subject to the minimum net capital requirements of the SEC and the U.S.
Commodity Futures Trading Commission (the CFTC). MS&Co. has consistently operated with capital in
excess of its regulatory capital requirements. MS&Co.s net capital totaled $6,530 million and $6,593 million at
March 31, 2015 and December 31, 2014, respectively, which exceeded the amount required by $4,701 million
and $4,928 million, respectively. MS&Co. is required to hold tentative net capital in excess of $1 billion and net
capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E of SEC
Rule 15c3-1. MS&Co. is also required to notify the SEC in the event that its tentative net capital is less than
$5 billion. At March 31, 2015 and December 31, 2014, MS&Co. had tentative net capital in excess of the
minimum and the notification requirements.
75
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
MSSB LLC is a registered broker-dealer and introducing broker for the futures business and, accordingly, is
subject to the minimum net capital requirements of the SEC and the CFTC. MSSB LLC has consistently operated
with capital in excess of its regulatory capital requirements. MSSB LLCs net capital totaled $4,934 million and
$4,620 million at March 31, 2015 and December 31, 2014, respectively, which exceeded the amount required by
$4,778 million and $4,460 million, respectively.
MSIP, a London-based broker-dealer subsidiary, is subject to the capital requirements of the Prudential
Regulation Authority, and MSMS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements
of the Financial Services Agency. MSIP and MSMS have consistently operated with capital in excess of their
respective regulatory capital requirements.
Other Regulated Subsidiaries. Certain other U.S. and non-U.S. subsidiaries of the Company are subject to
various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently
operated with capital in excess of their local capital adequacy requirements.
Morgan Stanley Derivative Products Inc. (MSDP), a derivative products subsidiary rated A3 by Moodys and
AA- by S&P, maintains certain operating restrictions that have been reviewed by Moodys and S&P. MSDP is
operated such that creditors of the Company should not expect to have any claims on the assets of MSDP, unless
and until the obligations to its own creditors are satisfied in full. Creditors of MSDP should not expect to have
any claims on the assets of the Company or any of its affiliates, other than the respective assets of MSDP.
13. Total Equity
Morgan Stanley Shareholders Equity.
In March 2015, the Company received no objection from the Federal Reserve to its 2015 capital plan. The capital
plan included a share repurchase of up to $3.1 billion of the Companys outstanding common stock beginning in
the second quarter of 2015 through the end of the second quarter of 2016. Additionally, the capital plan included
an increase in the Companys quarterly common stock dividend to $0.15 per share from $0.10 per share,
beginning with the dividend declared on April 20, 2015. During the quarter ended March 31, 2015 and 2014, the
Company repurchased approximately $250 million and $150 million, respectively, of the Companys outstanding
common stock as part of its share repurchase program.
The Company has sufficient authorization for the proposed share repurchases pursuant to the capital plan under
its existing share repurchase program for capital management purposes. Pursuant to the share repurchase
program, the Company considers, among other things, business segment capital needs as well as equity-based
compensation and benefit plan requirements. Share repurchases under the Companys program will be exercised
from time to time at prices the Company deems appropriate subject to various factors, including the Companys
capital position and market conditions. The share repurchases may be effected through open market purchases or
privately negotiated transactions, including through Rule 10b5-1 plans, and may be suspended at any time. Share
repurchases by the Company are subject to regulatory approval.
Preferred Stock.
Series J Preferred Stock. On March 19, 2015, the Company issued 1,500,000 Depositary Shares, for an
aggregate price of $1,500 million. Each Depositary Share represents a 1/25th interest in a share of perpetual
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series J, $0.01 par value (Series J Preferred Stock).
The Series J Preferred Stock is redeemable at the Companys option, (i) in whole or in part, from time to time, on
76
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
any dividend payment date on or after July 15, 2020 or (ii) in whole but not in part at any time within 90 days
following a regulatory capital treatment event (as described in the terms of that series), in each case at a
redemption price of $25,000 per share (equivalent to $1,000 per Depositary Share), plus any declared and unpaid
dividends to, but excluding, the date fixed for redemption, without accumulation of any undeclared dividends.
The Series J Preferred Stock also has a preference over the Companys common stock upon liquidation. The
Series J Preferred Stock offering (net of related issuance costs) resulted in proceeds of approximately $1,493
million.
For a description of preferred stock issuances, Series A through Series I, see Note 15 to the consolidated financial
statements in the 2014 Form 10-K.
The Company is authorized to issue 30 million shares of preferred stock, and the Companys preferred stock
outstanding consisted of the following (in millions, except per share data):
Carrying Value
Shares
Outstanding
at March 31,
2015
Liquidation
Preference
per Share
At
March 31,
2015
At
December 31,
2014
44,000
519,882
34,500
34,000
20,000
52,000
40,000
60,000
$25,000
1,000
25,000
25,000
25,000
25,000
25,000
25,000
$1,100
408
862
850
500
1,300
1,000
1,500
$1,100
408
862
850
500
1,300
1,000
$7,520
$6,020
A ................................................
C ................................................
E ................................................
F ................................................
G ................................................
H ................................................
I .................................................
J .................................................
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
During the quarters ended March 31, 2015 and 2014, dividends declared on the Companys outstanding preferred
stock were $78 million and $54 million, respectively.
Accumulated Other Comprehensive Income (Loss).
The following tables present changes in AOCI by component, net of noncontrolling interests, in the quarters
ended March 31, 2015 and 2014 (dollars in millions):
Foreign
Currency
Translation
Adjustments
$(663)
(220)
(220)
$(883)
Net Change
in
Cash Flow
Hedges
Pension,
Postretirement
and Other Related
Adjustments
Total
$ (73)
$(515)
$(1,248)
215
(15)
1
1
200
$127
Change in
Net Unrealized
Gains (Losses) on
AFS Securities
$
77
(5)
(13)
(18)
$(514)
$(1,266)
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Foreign
Currency
Translation
Adjustments
Net Change
in
Cash Flow
Hedges
Change in
Net Unrealized
Gains (Losses) on
AFS Securities
Pension,
Postretirement
and Other Related
Adjustments
Total
$(266)
$ (1)
$(282)
$(544)
$(1,093)
48
48
$(218)
78
(4)
74
$(208)
126
(1)
125
$(542)
$ (968)
The Company had no significant reclassifications out of AOCI for the quarters ended March 31, 2015 and 2014.
Nonredeemable Noncontrolling Interests.
Nonredeemable noncontrolling interests were $1,304 million and $1,204 million at March 31, 2015 and
December 31, 2014, respectively. Changes in nonredeemable noncontrolling interests were not significant in the
quarter ended March 31, 2015.
78
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
14. Earnings per Common Share.
Basic earnings per common share (EPS) is computed by dividing earnings applicable to Morgan Stanley
common shareholders by the weighted average number of common shares outstanding for the period. Common
shares outstanding include common stock and vested restricted stock units (RSUs) where recipients have
satisfied either the explicit vesting terms or retirement eligibility requirements. Diluted EPS reflects the assumed
conversion of all dilutive securities. The Company calculates EPS using the two-class method and determines
whether instruments granted in share-based payment transactions are participating securities (see Note 2 to the
consolidated financial statements in the 2014 Form 10-K). The following table presents the calculation of basic
and diluted EPS (in millions, except for per share data):
Three Months Ended
March 31,
2015
2014
Basic EPS:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,468
(5)
$1,585
(1)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . .
2,463
69
1,584
79
2,394
(11)
(13)
(15)
(15)
(8)
(16)
1,505
(11)
(13)
(15)
(15)
(2)
(2)
$2,314
$1,449
1,924
1,924
$ 1.21
(0.01)
$ 0.75
$ 1.20
$ 0.75
$2,314
1,924
$1,449
1,924
39
45
1,963
1,969
$ 1.18
$ 0.74
$ 1.18
$ 0.74
(1) RSUs that are considered participating securities participate in all of the earnings of the Company in the computation of basic EPS, and,
therefore, such RSUs are not included as incremental shares in the diluted calculation.
79
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
The following securities were considered antidilutive and, therefore, were excluded from the computation of
diluted EPS:
Three Months Ended
March 31,
2015
2014
(shares in millions)
1
11
16
13
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
29
Interest income(1):
Trading assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell and Securities borrowed(3) . . . . . . . . . . .
Customer receivables and Other(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 594 $ 514
201
138
474
355
22
38
(104)
(9)
297
307
$1,484
Interest expense(1):
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase and Securities loaned(5) . . . . . . . . . . . . . .
Customer payables and Other(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,343
18 $ 23
4
926
932
308
326
(368)
(246)
$ 888
$1,035
Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 596
$ 308
(1) Interest income and expense are recorded within the Companys condensed consolidated statements of income depending on the nature
of the instrument and related market conventions. When interest is included as a component of the instruments fair value, interest is
included within Trading revenues or Investments revenues. Otherwise, it is included within Interest income or Interest expense.
(2) Interest expense on Trading liabilities is reported as a reduction to Interest income on Trading assets.
(3) Includes fees paid on Securities borrowed.
(4) Includes interest from Customer receivables and Other interest earning assets.
(5) Includes fees received on Securities loaned.
(6) Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers short positions.
80
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
16. Employee Benefit Plans.
The Company sponsors various pension plans for the majority of its U.S. and non-U.S. employees. The Company
provides certain other postretirement benefits, primarily health care and life insurance, to eligible U.S.
employees. The Company also provides certain postemployment benefits to certain former employees or inactive
employees prior to retirement.
The components of the Companys net periodic benefit expense for its pension and postretirement plans were as
follows:
Three Months Ended
March 31,
2015
2014
(dollars in millions)
$ 5
39
(30)
(5)
6
$ 6
40
(28)
(3)
6
$ 15
$ 21
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
simplify the Companys legal entity organization in the U.K. Excluding the net discrete tax benefit noted above,
the effective tax rate from continuing operations for the quarter ended March 31, 2015 would have been 33.3%,
reflecting the geographic mix of earnings. The Companys effective tax rate from continuing operations for the
quarter ended March 31, 2014 was 33.1%.
18. Segment and Geographic Information.
Segment Information.
The Company structures its segments primarily based upon the nature of the financial products and services provided
to customers and the Companys management organization. The Company provides a wide range of financial products
and services to its customers in each of its business segments: Institutional Securities, Wealth Management and
Investment Management. For a further discussion of the Companys business segments, see Note 1.
Revenues and expenses directly associated with each respective business segment are included in determining its
operating results. Other revenues and expenses that are not directly attributable to a particular business segment
are allocated based upon the Companys allocation methodologies, generally based on each business segments
respective net revenues, non-interest expenses or other relevant measures.
As a result of revenues and expenses from transactions with other operating segments being treated as
transactions with external parties, the Company includes an Intersegment Eliminations category to reconcile the
business segment results to the Companys consolidated results. Intersegment Eliminations also reflect the effect
of fees paid by the Companys Institutional Securities business segment to the Companys Wealth Management
business segment related to the bank deposit program.
Selected financial information for the Companys business segments is presented below:
Institutional
Wealth
Investment Intersegment
Securities Management Management Eliminations
(dollars in millions)
Total
$5,546
870
958
(88)
$5,458
$3,145
737
48
689
$3,834
$674
1
6
(5)
$669
$ (54)
(124)
(124)
$ (54)
$9,311
1,484
888
596
$9,907
$1,813
6
1,807
$ 855
320
535
$187
61
126
$2,855
387
2,468
(8)
(3)
(5)
1,802
52
$1,750
(8)
(3)
535
126
(5)
2,463
$ 535
17
$109
69
$2,394
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Three Months Ended March 31, 2014
Institutional
Wealth
Investment
Intersegment
Securities Management(3) Management(3) Eliminations
(dollars in millions)
$4,902
881
1,106
$3,071
581
43
(225)
538
$756
1
5
Total
$ (41)
(120)
(119)
$8,688
1,343
1,035
(1)
308
(4)
Net revenues . . . . . . . . . . . . . . . . . . . . . . .
$4,677
$3,609
$752
$ (42)
$8,996
$1,416
426
$ 686
265
$268
94
$2,370
785
990
421
174
1,585
(2)
(1)
(1)
Discontinued operations:
Income (loss) from discontinued operations
before income taxes . . . . . . . . . . . . . . . . . . .
Provision for (benefit from) income taxes . . . .
(3)
(1)
(2)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to nonredeemable
noncontrolling interests . . . . . . . . . . . . . . . .
988
421
175
1,584
25
54
79
$ 963
$121
$1,505
$ 421
(1) In certain management fee arrangements, the Company is entitled to receive performance-based fees (also referred to as incentive fees)
when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements,
performance fee revenue is accrued (or reversed) quarterly based on measuring account fund performance to date versus the performance
benchmark stated in the investment management agreement. The amount of cumulative performance-based fee revenue at risk of
reversing if fund performance falls below stated investment management agreement benchmarks was approximately $670 million at
March 31, 2015 and approximately $634 million at December 31, 2014 (see Note 2 to the Companys consolidated financial statements
in the 2014 Form 10-K).
(2) The Companys effective tax rate from continuing operations for the quarter ended March 31, 2015 included a net discrete tax benefit of
$564 million (within the Companys Institutional Securities business segment) (see Note 17).
(3) On October 1, 2014, the Managed Futures business was transferred from the Companys Wealth Management business segment to the
Companys Investment Management business segment. All prior-period amounts have been recast to conform to the current years
presentation.
Total Assets(1)
Institutional
Securities
Wealth
Investment
Management Management
(dollars in millions)
$658,933
$164,230
$5,936
$829,099
$630,341
$165,147
$6,022
$801,510
Total
(1) Corporate assets have been fully allocated to the Companys business segments.
Geographic Information.
The Company operates in both U.S. and non-U.S. markets. The Companys non-U.S. business activities are
principally conducted and managed through European and Asia-Pacific locations. The net revenues disclosed in
83
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
the following table reflect the regional view of the Companys consolidated net revenues on a managed basis,
based on the following methodology:
Institutional Securities: advisory and equity underwritingclient location, debt underwritingrevenue
recording location, sales and tradingtrading desk location.
Wealth Management: wealth management representatives operate in the Americas.
Investment Management: client location, except for Merchant Banking and Real Estate Investing
businesses, which are based on asset location.
Net Revenues
Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,930
1,762
1,215
$6,582
1,422
992
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,907
$8,996
MORGAN STANLEY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Long-Term Borrowings.
Subsequent to March 31, 2015 and through April 30, 2015, the Companys long-term borrowings decreased by
approximately $0.1 billion. This amount includes the Companys issuance of $2.0 billion in subordinated debt on
April 23, 2015.
Capital Trusts.
On April 27, 2015, the Company announced that Morgan Stanley Capital Trust VI will redeem all of the issued
and outstanding $862.5 million aggregate liquidation amount of its 6.60% Capital Securities on May 27, 2015,
and that Morgan Stanley Capital Trust VII will redeem all of the issued and outstanding $1,100 million aggregate
liquidation amount of its 6.60% Capital Securities on May 12, 2015.
85
86
Item 2.
Introduction.
Morgan Stanley, a financial holding company, is a global financial services firm that maintains significant
market positions in each of its business segmentsInstitutional Securities, Wealth Management and Investment
Management. Morgan Stanley, through its subsidiaries and affiliates, provides a wide variety of products and
services to a large and diversified group of clients and customers, including corporations, governments, financial
institutions and individuals. Unless the context otherwise requires, the terms Morgan Stanley or the
Company mean Morgan Stanley (the Parent) together with its consolidated subsidiaries.
A brief summary of the activities of each of the Companys business segments is as follows:
Institutional Securities provides financial advisory and capital-raising services, including: advice on mergers
and acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financing
and market-making activities in equity and fixed income securities and related products, including foreign
exchange and commodities; and investment activities.
Wealth Management provides brokerage and investment advisory services to individual investors and smallto-medium sized businesses and institutions covering various investment alternatives; financial and wealth
planning services; annuity and other insurance products; credit and other lending products; cash
management services; and retirement services; and engages in fixed income trading, which primarily
facilitates clients trading or investments in such securities.
Investment Management provides a broad array of investment strategies that span the risk/return spectrum
across geographies, asset classes, and public and private markets to a diverse group of clients across the
institutional and intermediary channels as well as high net worth clients.
The results of operations in the past have been, and in the future may continue to be, materially affected by many
factors, including: the effect of economic and political conditions and geopolitical events; the effect of market
conditions, particularly in the global equity, fixed income, currency, credit and commodities markets, including
corporate and mortgage (commercial and residential) lending and commercial real estate markets and energy
markets; the impact of current, pending and future legislation (including the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the Dodd-Frank Act)), regulation (including capital, leverage and liquidity
requirements), policies (including fiscal and monetary), and legal and regulatory actions in the United States of
America (U.S.) and worldwide; the level and volatility of equity, fixed income and commodity prices
(including oil prices), interest rates, currency values and other market indices; the availability and cost of both
credit and capital as well as the credit ratings assigned to the Companys unsecured short-term and long-term
debt; investor, consumer and business sentiment and confidence in the financial markets; the performance of the
Companys acquisitions, divestitures, joint ventures, strategic alliances or other strategic arrangements; the
Companys reputation and the general perception of the financial services industry; inflation, natural disasters,
pandemics and acts of war or terrorism; the actions and initiatives of current and potential competitors as well as
governments, regulators and self-regulatory organizations; the effectiveness of the Companys risk management
policies; technological changes and risks and cybersecurity risks (including cyber attacks and business continuity
risks); or a combination of these or other factors. In addition, legislative, legal and regulatory developments
related to the Companys businesses are likely to increase costs, thereby affecting results of operations. These
factors also may have an adverse impact on the Companys ability to achieve its strategic objectives. For a
further discussion of these and other important factors that could affect the Companys business, see Business
Competition and BusinessSupervision and Regulation in Part I, Item 1, Risk Factors in Part I, Item 1A of
the Companys Annual Report on Form 10-K for the year ended December 31, 2014 (the 2014 Form 10-K) and
Liquidity and Capital ResourcesRegulatory Requirements herein.
87
The discussion of the Companys results of operations below may contain forward-looking statements. These
statements, which reflect managements beliefs and expectations, are subject to risks and uncertainties that may
cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect the
Companys future results, see Forward-Looking Statements immediately preceding Part I, Item 1, Business
Competition and BusinessSupervision and Regulation in Part I, Item 1, Risk Factors in Part I, Item 1A of
the 2014 Form 10-K and Liquidity and Capital ResourcesRegulatory Requirements herein.
Executive Summary.
Financial Information and Statistical Data (dollars in millions, except where noted and per share amounts).
Three Months Ended
March 31,
2015
2014
Net revenues:
Institutional Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth Management(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Management(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersegment Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,458
3,834
669
(54)
$4,677
3,609
752
(42)
$9,907
$8,996
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to nonredeemable noncontrolling interests(2) . . . . . . . . . . . . . . .
$2,463
69
$1,584
79
$2,394
$1,505
$1,755
535
109
$ 965
421
120
$2,399
(5)
$1,506
(1)
$2,394
80
$1,505
56
$2,314
$1,449
$ 1.21
(0.01)
$ 0.75
$ 1.20
$ 0.75
$ 1.18
$ 0.74
$ 1.18
$ 0.74
$6,930
1,762
1,215
$6,582
1,422
992
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,907
$8,996
13.6%
33.1%
Financial Information and Statistical Data (dollars in millions, except where noted and per share amounts)
(Continued).
Total loans(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Subsidiary Banks loans(5)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Subsidiary Banks assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities of long-term borrowings outstanding (next 12 months) . . . . . . .
Worldwide employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per common share(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global Liquidity Reserve managed by bank and non-bank legal entities
(dollars in billions)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital ratios(9):
Common Equity Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage ratio(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated assets under management or supervision (dollars in
billions)(1)(11):
Investment Management(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At
March 31, 2015
At
December 31, 2014
$ 68,703
$829,099
$ 63,564
$153,629
$135,815
$155,545
$ 24,229
56,087
$ 33.80
$ 66,577
$801,510
$ 59,622
$151,157
$133,544
$152,772
$ 20,740
55,802
$ 33.25
195
13.1%
14.7%
17.5%
7.8%
$
$
406
797
1,203
193
12.6%
14.1%
16.4%
7.9%
$
$
403
778
1,181
89
33%
22%
28%
29%
$
37.0
10.3
2.3
16.0
65.6
18.7%
18.9%
19.4%
14.2%
55.9
30%
19%
36%
26%
$
30.8
11.3
2.6
18.6
63.3
12.2%
14.0%
18.6%
9.2%
53.4
16.6%
$
$
87
109
196
10.9%
$
$
90
110
200
$9,782
$8,870
$2,319
$1,431
$ 1.14
$ 0.70
13.5%
8.5%
15.8%
10.1%
At
March 31, 2015
At
December 31, 2014
$28.91
$28.26
90
(15) The calculation of the return on average common equity from continuing operations uses income from continuing operations applicable to
the Company less preferred dividends as a percentage of average common equity. The annualized return on average common equity from
continuing operations and annualized return on average common equity from continuing operations, excluding DVA, and excluding DVA
and the net discrete tax benefit, are non-GAAP financial measures that the Company considers useful for investors to allow better
comparability of period-to-period operating performance. To determine the return on average common equity from continuing operations,
excluding DVA, and excluding DVA and the net discrete tax benefit, both the numerator and denominator were adjusted to exclude those
items. The calculation of each business segments return on average common equity uses income from continuing operations applicable to
Morgan Stanley less preferred dividends as a percentage of each business segments average common equity. The effective tax rates used
in the computation of business segments return on average common equity were determined on a separate legal entity basis.
Three Months Ended
March 31,
2015
2014
Reconciliation of return on average common equity from continuing operations, excluding DVA
and net discrete tax benefit to return on average common equity from continuing operations:
Return on average common equity from continuing operations, excluding DVA and net discrete
tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net discrete tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.1%
3.4%
8.5%
N/A
13.5%
0.7%
8.5%
0.7%
14.2%
9.2%
N/ANot Applicable.
(16) Average tangible common equity is a non-GAAP financial measure that the Company considers to be a useful measure to the Company
and investors to assess capital adequacy. For a discussion of tangible common equity, see Liquidity and Capital ResourcesCapital
Management herein.
(17) Annualized return on average tangible common equity is a non-GAAP financial measure that the Company considers to be a useful
measure to the Company and investors to assess capital adequacy. The calculation of return on average tangible common equity uses
income from continuing operations applicable to Morgan Stanley less preferred dividends as a percentage of average tangible common
equity. To determine the return on average tangible common equity, excluding the impact of DVA, also a non-GAAP financial measure,
both the numerator and the denominator were adjusted to exclude the impact of DVA. The impact of DVA for the quarters ended March
31, 2015 and 2014 was 0.8% in both periods.
(18) The Company calculates the average Global Liquidity Reserve based upon daily amounts.
(19) From time to time, the Company may disclose certain non-GAAP financial measures in the course of its earnings releases, earnings
conference calls, financial presentations and otherwise. The U.S. Securities and Exchange Commission (the SEC) defines a non-GAAP
financial measure as a numerical measure of historical or future financial performance, financial positions, or cash flows that excludes or
includes amounts or is subject to adjustments that effectively exclude, or include, amounts from the most directly comparable measure
calculated and presented in accordance with U.S. GAAP. Non-GAAP financial measures disclosed by the Company are provided as additional
information to investors in order to provide them with further transparency about, or as an alternative method for assessing, the Companys
financial condition and operating results. These measures are not in accordance with, or a substitute for, U.S. GAAP, and may be different from
or inconsistent with non-GAAP financial measures used by other companies. Whenever the Company refers to a non-GAAP financial measure,
the Company will also generally present the most directly comparable financial measure calculated and presented in accordance with U.S.
GAAP, along with a reconciliation of the differences between the non-GAAP financial measure and the U.S. GAAP financial measure.
Three Months Ended
March 31,
2015
2014
$9,782
125
$8,870
126
$9,907
$8,996
$2,319
80
$1,431
75
$2,399
$1,506
$ 1.14
0.04
$ 0.70
0.04
$ 1.18
$ 0.74
91
33.3%
19.7%
13.6%
33.1%
N/A
33.1%
N/ANot Applicable.
(20) Tangible book value per common share equals tangible common equity of $56,985 million at March 31, 2015 and $55,138 million at
December 31, 2014 divided by common shares outstanding of 1,971 million at March 31, 2015 and 1,951 million at December 31, 2014.
Tangible book value per common share is a non-GAAP financial measure that the Company considers to be a useful measure that the
Company and investors use to assess capital adequacy.
2015. In China, weaker momentum in domestic demand despite a notable improvement in export growth, while
substantially negative producer prices, showed entrenched deflationary pressures. The Peoples Bank of China
lowered its deposit and lending rates 25 basis points each to 2.50% and 5.35%, respectively, effective March 1,
2015. The Chinese government continued reforms to change the structure of the Chinese economy with targeted
easing measures by its central bank. The Chinese government also pursued growth rebalancing measures via
encouraging consumption and pursuing structural reforms to boost productivity growth, which helped support a
7.0% gain in real GDP during the first quarter of 2015. Major equity market indices in Asia ended the first
quarter of 2015 higher compared with year-end 2014, with the Japanese and Chinese equity markets both higher
by more than 10%. In April 2015, the Peoples Bank of China lowered its capital reserve-requirement ratio by
1.0% to 18.5%.
Overview of the Quarter Ended March 31, 2015 Financial Results.
Consolidated Results. The Company recorded net income applicable to Morgan Stanley of $2,394 million on
net revenues of $9,907 million in the quarter ended March 31, 2015 (current quarter) compared with net
income applicable to Morgan Stanley of $1,505 million on net revenues of $8,996 million in the quarter ended
March 31, 2014 (prior year quarter).
Net revenues in the current quarter included positive revenues due to the impact of DVA of $125 million
compared with positive revenues of $126 million in the prior year quarter. Non-interest expenses were $7,052
million in the current quarter compared with $6,626 million in the prior year quarter. Compensation expenses
increased 5% to $4,524 million in the current quarter compared with $4,306 million in the prior year quarter.
Non-compensation expenses increased 9% to $2,528 million in the current quarter compared with $2,320 million
in the prior year quarter.
Both diluted EPS and diluted EPS from continuing operations were $1.18 in the current quarter compared with
$0.74 in the prior year quarter.
Excluding the impact of DVA, net revenues were $9,782 million and diluted EPS from continuing operations
were $1.14 per share in the current quarter compared with $8,870 million and $0.70 per share, respectively, in the
prior year quarter. The presentation of net revenues excluding the impact of DVA is a non-GAAP financial
measure that the Company considers useful for the Company and investors to allow further comparability of
period-to-period operating performance.
The Companys effective tax rate from continuing operations was 13.6% and 33.1% for the quarters ended
March 31, 2015 and 2014, respectively. The results for the quarter ended March 31, 2015 included a net discrete
tax benefit of $564 million. Excluding this net discrete tax benefit, the effective tax rate from continuing
operations for the quarter ended March 31, 2015 would have been 33.3%, reflecting the geographic mix of
earnings. For a discussion of the net discrete tax benefit, see Other MattersIncome Tax Matters herein.
Institutional Securities. Income from continuing operations before taxes was $1,813 million in the current
quarter compared with $1,416 million in the prior year quarter. Net revenues for the current quarter were $5,458
million compared with $4,677 million in the prior year quarter. The results in the current quarter included
positive revenues due to the impact of DVA of $125 million compared with positive revenues of $126 million in
the prior year quarter. Investment banking revenues increased 3% from the prior year quarter to $1,173 million in
the current quarter, as an increase in advisory revenues was partially offset by a decrease in underwriting
revenues. Equity sales and trading net revenues, excluding the impact of DVA, increased 33% from the prior
year quarter to $2,268 million in the current quarter, reflecting strong results across derivatives, prime brokerage
and cash equities products as well as across regions. Excluding the impact of DVA, fixed income and
commodities sales and trading net revenues increased 15% from the prior year quarter to $1,903 million in the
current quarter, primarily reflecting higher fixed income product net revenues. Non-interest expenses increased
12% from $3,261 million in the prior year quarter to $3,645 million in the current quarter, reflecting higher noncompensation expenses related to higher legal costs and volume driven expenses and higher compensation
expenses related to higher revenues.
93
Wealth Management. Income from continuing operations before taxes was $855 million in the current quarter
compared with $686 million in the prior year quarter. Net revenues were $3,834 million in the current quarter
compared with $3,609 million in the prior year quarter. Transactional revenues, consisting of Investment
banking, Trading, and Commissions and fees, decreased 5% from the prior year quarter to $950 million in the
current quarter, reflecting lower Trading revenues and a decrease in Commissions and fees. Asset management,
distribution and administration fees increased 5% from the prior year quarter to $2,115 million in the current
quarter, primarily due to higher fee-based revenues partially offset by lower revenues from referral fees from the
bank deposit program, reflecting the ongoing transfer of deposits to the Company from Citigroup Inc. (Citi).
Net interest increased 28% from the prior year quarter to $689 million in the current quarter, primarily due to
higher balances in the bank deposit program and growth in loans and lending commitments in Portfolio Loan
Account (PLA) securities-based lending products. Non-interest expenses increased 2% from $2,923 million in
the prior year quarter to $2,979 million in the current quarter primarily due to higher compensation expenses.
Total client asset balances were $2,047 billion and total client liability balances were $54 billion at March 31,
2015. Balances in the bank deposit program were $135 billion at March 31, 2015, which included deposits held
by Company-affiliated Federal Deposit Insurance Corporation (FDIC) insured depository institutions of $130
billion at March 31, 2015. Client assets in fee-based accounts were $803 billion, or 39% of total client assets, at
March 31, 2015. Fee-based client asset flows for the current quarter were $13.3 billion compared with $19.0
billion in the prior year quarter.
Investment Management. Income from continuing operations before taxes was $187 million in the current
quarter compared with $268 million in the prior year quarter. Net revenues were $669 million in the current
quarter compared with $752 million in the prior year quarter. The decrease in net revenues was primarily related
to lower net investment gains and lower revenues in the Companys Merchant Banking and Real Estate Investing
business due to the deconsolidation of certain legal entities associated with a real estate fund sponsored by the
Company in the second quarter of 2014. Non-interest expenses of $482 million in the current quarter were
essentially unchanged from the prior year quarter.
94
Business Segments.
Substantially all of the Companys operating revenues and operating expenses are directly attributable to its
business segments. Certain revenues and expenses have been allocated to each business segment, generally in
proportion to its respective net revenues, non-interest expenses or other relevant measures.
As a result of treating certain intersegment transactions as transactions with external parties, the Company includes
an Intersegment Eliminations category to reconcile the business segment results to the Companys consolidated
results. Intersegment Eliminations also reflect the effect of fees paid by the Companys Institutional Securities
business segment to the Companys Wealth Management business segment related to the bank deposit program.
Net Revenues.
Trading. Trading revenues include revenues from customers purchases and sales of financial instruments in
which the Company acts as a market maker as well as gains and losses on the Companys related positions.
Trading revenues include the realized gains and losses from sales of cash instruments and derivative settlements,
unrealized gains and losses from ongoing fair value changes of the Companys positions related to marketmaking activities, and gains and losses related to investments associated with certain employee deferred
compensation plans. In many markets, the realized and unrealized gains and losses from the purchase and sale
transactions will include any spreads between bids and offers. Certain fees received on loans carried at fair value
and dividends from equity securities are also recorded in this line item since they relate to market-making
positions. Commissions received for purchasing and selling listed equity securities and options are recorded
separately in the Commissions and fees line item. Other cash and derivative instruments typically do not have
fees associated with them, and fees for related services are recorded in Commissions and fees.
The Company often invests in investments or other financial instruments to economically hedge its obligations
under its deferred compensation plans. Changes in value of such investments made by the Company are recorded
in Trading revenues and Investments revenues. Expenses associated with the related deferred compensation plans
are recorded in Compensation and benefits. Compensation expense is calculated based on the notional value of
the award granted, adjusted for upward and downward changes in fair value of the referenced investment and is
recognized ratably over the prescribed vesting period for the award. Generally, changes in compensation expense
resulting from changes in fair value of the referenced investment will be offset by changes in fair value of the
investments made by the Company. However, there may be a timing difference between the immediate revenue
recognition of gains and losses on the Companys investments and the deferred recognition of the related
compensation expense over the vesting period.
As a market maker, the Company stands ready to buy, sell or otherwise transact with customers under a variety
of market conditions and to provide firm or indicative prices in response to customer requests. The Companys
liquidity obligations can be explicit and obligatory in some cases, and in others, customers expect the Company
to be willing to transact with them. In order to most effectively fulfill its market-making function, the Company
engages in activities across all of its trading businesses that include, but are not limited to: (i) taking positions in
anticipation of, and in response to, customer demand to buy or sell anddepending on the liquidity of the
relevant market and the size of the positionto hold those positions for a period of time; (ii) managing and
assuming basis risk (risk associated with imperfect hedging) between customized customer risks and the
standardized products available in the market to hedge those risks; (iii) building, maintaining and rebalancing
inventory, through trades with other market participants, and engaging in accumulation activities to
accommodate anticipated customer demand; (iv) trading in the market to remain current on pricing and trends;
and (v) engaging in other activities to provide efficiency and liquidity for markets. Although not included in
Trading revenues, interest income and interest expense are also impacted by market-making activities as debt
securities held by the Company earn interest and securities are loaned, borrowed, sold with agreement to
repurchase and purchased with agreement to resell.
95
Investments. The Companys investments generally are held for long-term appreciation and generally are
subject to significant sales restrictions. Estimates of the fair value of the investments may involve significant
judgment and may fluctuate significantly over time in light of business, market, economic and financial
conditions generally or in relation to specific transactions. In some cases, such investments are required or are a
necessary part of offering other products. The revenues recorded are the result of realized gains and losses from
sales and unrealized gains and losses from ongoing fair value changes of the Companys holdings as well as from
investments associated with certain employee deferred compensation and co-investment plans. Typically, there
are no fee revenues from these investments. The sales restrictions on the investments relate primarily to
redemption and withdrawal restrictions on investments in real estate funds, hedge funds and private equity funds,
which include investments made in connection with certain employee deferred compensation plans (see Note 3 to
the Companys condensed consolidated financial statements in Item 1). Restrictions on interests in exchanges
and clearinghouses generally include a requirement to hold those interests for the period of time that the
Company is clearing trades on that exchange or clearinghouse. Additionally, there are certain investments related
to assets held by consolidated real estate funds, which are primarily related to holders of noncontrolling interests.
Commissions and Fees. Commission and fee revenues primarily arise from agency transactions in listed and
over-the-counter (OTC) equity securities, services related to sales and trading activities, and sales of mutual
funds, futures, insurance products and options.
Asset Management, Distribution and Administration Fees. Asset management, distribution and administration
fees include fees associated with the management and supervision of assets, account services and administration,
performance-based fees relating to certain funds, separately managed accounts, shareholder servicing and the
distribution of certain open-ended mutual funds.
Asset management, distribution and administration fees in the Companys Wealth Management business segment
also include revenues from individual investors electing a fee-based pricing arrangement and fees for investment
management. Mutual fund distribution fees in the Companys Wealth Management business segment are based
on either the average daily fund net asset balances or average daily aggregate net fund sales and are affected by
changes in the overall level and mix of assets under management or supervision.
Asset management fees in the Companys Investment Management business segment arise from investment
management services the Company provides to investment vehicles pursuant to various contractual
arrangements. The Company receives fees primarily based upon mutual fund daily average net assets or based on
monthly or quarterly invested equity for other vehicles. Performance-based fees in the Companys Investment
Management business segment are earned on certain funds as a percentage of appreciation earned by those funds
and, in certain cases, are based upon the achievement of performance criteria. These fees are normally earned
annually and are recognized on a monthly or quarterly basis.
Net Interest. Interest income and Interest expense are a function of the level and mix of total assets and
liabilities, including Trading assets and Trading liabilities; Investment securities, which include available for sale
(AFS) securities and held to maturity (HTM) securities; Securities borrowed or purchased under agreements
to resell; Securities loaned or sold under agreements to repurchase; Loans; Deposits; Short-term borrowings;
Long-term borrowings; trading strategies; customer activity in the Companys prime brokerage business; and the
prevailing level, term structure and volatility of interest rates. Certain Securities purchased under agreements to
resell (reverse repurchase agreements) and Securities sold under agreements to repurchase (repurchase
agreements) and Securities borrowed and Securities loaned transactions may be entered into with different
customers using the same underlying securities, thereby generating a spread between the interest income on the
reverse repurchase agreements or securities borrowed transactions and the interest expense on the repurchase
agreements or securities loaned transactions.
96
Compensation Expense.
The Companys compensation and benefits expense includes accruals for base salaries and fixed allowances,
formulaic programs, discretionary incentive compensation, amortization of deferred cash and equity awards,
changes in fair value of deferred compensation plan referenced investments, and other items such as health and
welfare benefits. The factors that drive compensation for the Companys employees vary from quarter to quarter,
segment to segment and within a segment. For certain revenue-producing employees in the Companys Wealth
Management and Investment Management business segments, compensation is largely paid on the basis of
formulaic payouts that link their compensation to revenues. Compensation for certain employees, including
revenue-producing employees in the Companys Institutional Securities business segment, may also include
incentive compensation that is determined following the assessment of the Company, business unit and
individual performance. Compensation for the Companys remaining employees is largely fixed in nature (e.g.,
base salary, benefits, etc.).
97
INSTITUTIONAL SECURITIES
INCOME STATEMENT INFORMATION
Three Months Ended
March 31,
2015
2014
(dollars in millions)
Revenues:
Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,173
3,422
112
673
76
90
$1,136
2,707
109
678
81
191
5,546
4,902
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
870
958
881
1,106
Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(88)
(225)
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,458
4,677
2,026
1,619
1,853
1,408
3,645
3,261
1,813
6
1,416
426
1,807
990
Discontinued operations:
Income (loss) from discontinued operations before income taxes . . . . . . . . . . . . . . . . . .
Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8)
(3)
(3)
(1)
(5)
(2)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . .
1,802
52
988
25
$1,750
$ 963
$1,755
(5)
$ 965
(2)
$1,750
$ 963
98
Investment Banking. Investment banking revenues are composed of fees from advisory services and revenues
from the underwriting of securities offerings and syndication of loans, net of syndication expenses.
Investment banking revenues were as follows:
Three Months Ended
March 31,
2015
2014
(dollars in millions)
Advisory revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting revenues:
Equity underwriting revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income underwriting revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 471
$ 336
307
395
315
485
702
800
$1,173
$1,136
The following table presents the Companys volumes of announced and completed mergers and acquisitions,
equity and equity-related offerings, and fixed income offerings:
Three Months Ended
March 31,
2015(1)
2014(1)
(dollars in billions)
$134
124
19
78
$257
205
16
66
(1) Source: Thomson Reuters, data at April 16, 2015. Announced and completed mergers and acquisitions volumes are based on full credit
to each of the advisors in a transaction. Equity and equity-related offerings and fixed income offerings are based on full credit for single
book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In
addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or change
in the value of a transaction.
(2) Amounts include transactions of $100 million or more. Announced mergers and acquisitions exclude terminated transactions.
(3) Amounts include Rule 144A and public common stock, convertible and rights offerings.
(4) Amounts include non-convertible preferred stock, mortgage-backed and asset-backed securities and taxable municipal debt. Amounts
also include publicly registered and Rule 144A issues. Amounts exclude leveraged loans and self-led issuances.
Investment banking revenues for the quarter ended March 31, 2015 increased 3% from the comparable period of
2014, as an increase in advisory revenues was partially offset by a decrease in underwriting revenues. Advisory
revenues from merger, acquisition and restructuring transactions (M&A) were $471 million for the quarter
ended March 31, 2015, an increase of 40% from the comparable period of 2014, reflecting increased M&A
activity in the Americas and EMEA. Industry-wide announced M&A volume and deal activity for the quarter
ended March 31, 2015 increased globally from the comparable period of 2014. Overall, underwriting revenues of
$702 million decreased 12% from the comparable period of 2014. Equity underwriting revenues decreased 3% to
$307 million for the quarter ended March 31, 2015 as initial public offering activity decreased. Fixed income
underwriting revenues of $395 million decreased 19% from the comparable period of 2014, primarily driven by
lower loan volumes.
Sales and Trading Net Revenues. Sales and trading net revenues are composed of Trading revenues;
Commissions and fees; Asset management, distribution and administration fees; and Net interest income
(expenses). See Business SegmentsNet Revenues herein for information about the composition of the abovereferenced components of sales and trading revenues. In assessing the profitability of its sales and trading
activities, the Company views these net revenues in the aggregate. In addition, decisions relating to trading are
based on an overall review of aggregate revenues and costs associated with each transaction or series of
99
transactions. This review includes, among other things, an assessment of the potential gain or loss associated
with a transaction, including any associated commissions and fees, dividends, the interest income or expense
associated with financing or hedging the Companys positions, and other related expenses. See Note 10 to the
Companys condensed consolidated financial statements in Item 1 for further information related to gains (losses)
on derivative instruments.
Sales and trading net revenues were as follows:
Three Months Ended
March 31,
2015
2014
(dollars in millions)
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total sales and trading net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,422
673
76
(88)
$2,707
678
81
(225)
$4,083
$3,241
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income and commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total sales and trading net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,293
2,003
(213)
$1,755
1,730
(244)
$4,083
$3,241
(1) Amounts include net losses associated with costs related to the amount of liquidity held (negative carry), net gains (losses) on
economic hedges related to the Companys long-term borrowings, and revenues from corporate loans and lending commitments.
The following sales and trading net revenues results exclude the impact of DVA. The reconciliation of sales and
trading, including equity sales and trading and fixed income and commodities sales and trading net revenues,
from a non-GAAP to a GAAP basis is as follows:
Three Months Ended
March 31,
2015
2014
(dollars in millions)
$3,958
125
$3,115
126
$4,083
$3,241
$2,268
25
$1,705
50
$2,293
$1,755
$1,903
100
$1,654
76
$2,003
$1,730
(1) Sales and trading net revenues, including equity and fixed income and commodities sales and trading net revenues that exclude the
impact of DVA, are non-GAAP financial measures that the Company considers useful for the Company and investors to allow further
comparability of period-to-period operating performance.
100
Total sales and trading net revenues increased to $4,083 million for the quarter ended March 31, 2015 from
$3,241 million for the quarter ended March 31, 2014.
Equity. Equity sales and trading net revenues increased 31% to $2,293 million for the quarter ended March 31,
2015 from the comparable period in 2014. Equity sales and trading net revenues for the quarter ended March 31,
2015 included positive revenues of $25 million due to the impact of DVA compared with positive revenues of
$50 million for the quarter ended March 31, 2014. Equity sales and trading net revenues, excluding the impact of
DVA, increased 33% to $2,268 million for the quarter ended March 31, 2015 from the comparable period in
2014, reflecting strong results across derivatives, prime brokerage and cash equities products as well as across
regions. The increase in cash equities and derivatives reflected favorable market conditions including increased
index rebalance activity and electronic market making activities. Higher client balances primarily drove the
increase in prime brokerage results.
Fixed Income and Commodities. Fixed income and commodities sales and trading net revenues increased 16%
to $2,003 million for the quarter ended March 31, 2015 from $1,730 million for the quarter ended March 31,
2014. Results for the quarter ended March 31, 2015 included positive revenues of $100 million due to the impact
of DVA compared with positive revenues of $76 million for the quarter ended March 31, 2014. Excluding the
impact of DVA, fixed income and commodities sales and trading net revenues increased 15% to $1,903 million
for the quarter ended March 31, 2015 from $1,654 million for the quarter ended March 31, 2014 primarily
reflecting higher fixed income product net revenues. Fixed income product net revenues, excluding the impact of
DVA, for the quarter ended March 31, 2015 increased 22% from the comparable period of 2014 as higher results
in interest rate and foreign exchange products, which reflected increased levels of client activity, were partially
offset by lower results in credit products. Commodity net revenues, excluding the impact of DVA, for the quarter
ended March 31, 2015 increased 2% from the comparable period of 2014, primarily reflecting higher levels of
client demand for structured transactions in natural gas and power and increased volatility in oil liquid markets
partially offset by the absence of revenues from TransMontaigne Inc., which was sold on July 1, 2014.
Other. For the quarter ended March 31, 2015, other sales and trading recognized negative net revenues of $213
million compared with negative net revenues of $244 million for the quarter ended March 31, 2014. Results in both
periods included losses related to negative carry and losses on economic hedges and other costs related to the
Companys long-term borrowings. Results in both periods also included net revenues from corporate loans and lending
commitments, which were $53 million and $45 million for the quarters ended March 31, 2015 and 2014, respectively.
Other. Other revenues were $90 million for the quarter ended March 31, 2015 and compared with $191 million
for the quarter ended March 31, 2014. The results for the quarter ended March 31, 2015 included income of $69
million, arising from the Companys 40% stake in Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. compared
with income of $58 million for the quarter ended March 31, 2014 (see Note 19 to the Companys condensed
consolidated financial statements in Item 1). The results for the quarter ended March 31, 2014 also included the
sale of property related to TransMontaigne Inc., as well as a gain on sale of Canterm Canadian Terminals Inc. of
approximately $45 million (see Note 1 to the Companys condensed consolidated financial statements in Item 1).
Non-interest Expenses. Non-interest expenses for the quarter ended March 31, 2015 increased 12% from the
comparable period of 2014. The increase was driven by increases in both non-compensation and compensation
expenses. Non-compensation expenses for the quarter ended March 31, 2015 increased 15% from the comparable
period of 2014 as higher legal expense and higher brokerage, clearing and exchange fees driven by increased
levels of client activity were partially offset by lower occupancy expenses. Compensation and benefits expenses
for quarter ended March 31, 2015 increased 9% from the comparable period of 2014. The increase was primarily
due to an increase in discretionary incentive compensation due to higher revenues and the reduction of average
deferral rates for discretionary incentive based awards, partially offset by a decrease in amortization due to
accelerated vesting of certain awards during the fourth quarter of 2014.
Nonredeemable Noncontrolling Interests.
Nonredeemable noncontrolling interests primarily relate to Mitsubishi UFJ Financial Group, Inc.s interest in
Morgan Stanley MUFG Securities Co., Ltd. (see Note 19 to the Companys condensed consolidated financial
statements in Item 1).
101
WEALTH MANAGEMENT
INCOME STATEMENT INFORMATION
Three Months Ended
March 31,
2015
2014(1)
(dollars in millions)
Revenues:
Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 192
232
2
526
2,115
78
$ 181
275
4
540
2,008
63
3,145
3,071
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
737
48
581
43
Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
689
538
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,834
3,609
2,225
754
2,167
756
2,979
2,923
855
320
686
265
535
421
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
535
421
$ 535
$ 421
(1) On October 1, 2014, the Managed Futures business was transferred from the Companys Wealth Management business segment to the
Companys Investment Management business segment. All prior-period amounts have been recast to conform to the current years
presentation.
102
$
$
$
959
129
13.3
At
March 31,
2015
Client assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee-based client assets(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee-based client assets as a percentage of total client assets(5) . . . . . . . . . . . . . . . . . . . . .
Client liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank deposit program(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth Management U.S. Subsidiary Banks data(7):
Investment securities portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans and lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth Management representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
878
118
19.0
At
December 31,
2014
$ 2,047
$ 803
39%
$
54
$ 135
$ 2,025
$ 785
39%
$
51
$ 137
$
$
$
$
58.3
44.9
15,915
621
57.3
42.7
16,076
622
(1) On October 1, 2014, the Managed Futures business was transferred from the Companys Wealth Management business segment to the
Companys Investment Management business segment. All prior-period amounts have been recast to conform to the current years
presentation.
(2) Annualized revenues per representative for the quarters ended March 31, 2015 and 2014 equal the Companys Wealth Management
business segments annualized revenues divided by the average representative headcount for the quarters ended March 31, 2015 and
2014, respectively.
(3) Client assets per representative equal total period-end client assets divided by period-end representative headcount.
(4) Fee-based asset flows include net new fee-based assets, net account transfers, dividends, interest and client fees and exclude cash
management-related activity.
(5) Fee-based client assets represent the amount of assets in client accounts where the basis of payment for services is a fee calculated on
those assets.
(6) Balances in the bank deposit program included deposits held by the Companys U.S. Subsidiary Banks of $130 billion and $128 billion
at March 31, 2015 and December 31, 2014, respectively, with the remainder held at Citi-affiliated FDIC-insured depositories. See Note 3
to the Companys consolidated financial statements in Item 8 of the 2014 Form 10-K for further discussion of the Companys customer
deposits held by Citi.
(7) Wealth Management U.S. Subsidiary Banks refers to the Companys U.S. bank operating subsidiaries MSBNA and MSPBNA.
Wealth Management JV. On June 28, 2013, the Company completed the purchase of the remaining 35% stake
in the purchase of the retail securities joint venture between the Company and Citi (the Wealth Management
JV) for $4.725 billion. As the 100% owner of the Wealth Management JV, the Company retains all of the
related net income previously applicable to the noncontrolling interests in the Wealth Management JV and
benefits from the termination of certain related debt and operating agreements with the Wealth Management JV
partner.
Concurrent with the acquisition of the remaining 35% stake in the Wealth Management JV, the deposit sweep
agreement between Citi and the Company was terminated. During the quarters ended March 31, 2015 and 2014,
$4 billion and $5 billion, respectively, of deposits held by Citi relating to the Companys customer accounts were
transferred to the Companys depository institutions. At March 31, 2015, approximately $4 billion of additional
deposits are scheduled to be transferred to the Companys depository institutions on an agreed-upon basis
through June 2015.
For further information, see Note 3 to the Companys consolidated financial statements in Item 8 of the 2014
Form 10-K.
103
Net Revenues. The Companys Wealth Management business segments net revenues are composed of
Transactional, Asset management, Net interest and Other revenues. Transactional revenues include Investment
banking, Trading, and Commissions and fees. Asset management revenues include Asset management,
distribution and administration fees, and referral fees related to the bank deposit program. Net interest income
includes interest related to the bank deposit program, interest on AFS securities and HTM securities, interest on
lending activities and other net interest. Other revenues include revenues from AFS securities and HTM
securities, customer account services fees, other miscellaneous revenues and revenues from Investments.
Three Months Ended
March 31,
2015
2014(1)
(dollars in millions)
Net revenues:
Transactional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 950
2,115
689
80
$ 996
2,008
538
67
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,834
$3,609
(1) On October 1, 2014, the Managed Futures business was transferred from the Companys Wealth Management business segment to the
Companys Investment Management business segment. All prior-period amounts have been recast to conform to the current years
presentation.
Transactional.
Investment Banking. Investment banking revenues increased 6% to $192 million in the quarter ended
March 31, 2015 from the comparable period of 2014, primarily due to a revenue sharing arrangement with the
Companys Institutional Securities business segment related to municipal securities.
Trading. Trading revenues decreased 16% to $232 million in the quarter ended March 31, 2015 from the
comparable period of 2014, primarily due to lower revenues from fixed income products partially offset by
higher gains related to investments associated with certain employee deferred compensation plans.
Commissions and Fees. Commissions and fees revenues decreased 3% to $526 million in the quarter ended
March 31, 2015 from the comparable period of 2014, primarily due to lower equity, annuity and mutual fund
activity, partially offset by higher revenues from alternatives asset classes.
Asset Management.
Asset Management, Distribution and Administration Fees. Asset management, distribution and administration
fees increased 5% to $2,115 million in the quarter ended March 31, 2015 from the comparable period of 2014,
primarily due to higher fee-based revenues partially offset by lower revenues from referral fees from the bank
deposit program, reflecting the ongoing transfer of deposits to the Company from Citi.
Balances in the bank deposit program were $135 billion at March 31, 2015 and $137 billion at December 31,
2014, which included deposits held by the Companys U.S. Subsidiary Banks of $130 billion at March 31, 2015
and $128 billion at December 31, 2014.
Client assets in fee-based accounts increased to $803 billion and represented 39% of total client assets at
March 31, 2015 compared with $785 billion and 39% at December 31, 2014, respectively. Total client asset
balances increased to $2,047 billion at March 31, 2015 from $2,025 billion at December 31, 2014, primarily due
to higher fee-based asset flows and the impact of market conditions. Fee-based client asset flows for the quarter
ended March 31, 2015 were $13.3 billion compared with $19.0 billion in the quarter ended March 31, 2014.
104
Net Interest.
Net interest increased 28% to $689 million in the quarter ended March 31, 2015 from the comparable period of
2014, primarily due to higher balances in the bank deposit program and growth in loans and lending
commitments in PLA securities-based lending products. Total client liability balances increased to $54 billion at
March 31, 2015 from $51 billion at December 31, 2014, primarily due to higher growth from PLA securitiesbased lending products and residential mortgage loans. The loans and lending commitments in the Companys
Wealth Management business segment have grown in the quarter ended March 31, 2015, and the Company
expects this trend to continue. See Other MattersU.S. Subsidiary Banks Lending Activities herein and
Quantitative and Qualitative Disclosures about Market RiskCredit RiskLending Activities in Item 3.
Other.
Other revenues were $78 million in the quarter ended March 31, 2015 compared with $63 million in the quarter
ended March 31, 2014. The increase in the quarter ended March 31, 2015 primarily reflected higher gains on
sales of Investment securities.
Non-interest Expenses.
Non-interest expenses increased 2% in the quarter ended March 31, 2015 from the comparable period of 2014.
Compensation and benefits expenses increased 3% in the quarter ended March 31, 2015 from the comparable
period of 2014, primarily due to a higher formulaic payout to Wealth Management representatives linked to
higher net revenues. Non-compensation expenses of $754 million in the quarter ended March 31, 2015 were
essentially unchanged from the comparable period of 2014.
105
INVESTMENT MANAGEMENT
INCOME STATEMENT INFORMATION
Three Months Ended
March 31,
2015
2014(1)
(dollars in millions)
Revenues:
Investment banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset management, distribution and administration fees . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
152
514
5
4
(20)
246
486
40
674
756
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
6
1
5
(5)
(4)
Net interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
669
752
273
209
286
198
482
484
187
61
268
94
126
174
Discontinued operations:
Income from discontinued operations before income taxes . . . . . . . . . . . . . . . . . . . . .
Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income applicable to nonredeemable noncontrolling interests . . . . . . . . . . . . . . .
126
17
175
54
$ 109
$121
$ 109
$120
1
$ 109
$121
(1) On October 1, 2014, the Managed Futures business was transferred from the Companys Wealth Management business segment to the
Companys Investment Management business segment. All prior-period amounts have been recast to conform to the current years
presentation.
106
Statistical Data.
The Companys Investment Management business segments period-end and average assets under management
or supervision were as follows:
Average for
Three Months Ended
At March 31,
March 31,
2015
2014(1)
2015
2014(1)
(dollars in billions)
$141
65
131
36
3
$145
61
114
34
4
$142
65
127
36
3
$141
61
113
33
4
376
358
373
352
30
28
31
30
$406
$386
$404
$382
(1) On October 1, 2014, the Managed Futures business was transferred from the Companys Wealth Management business segment to the
Companys Investment Management business segment. All prior-period amounts have been recast to conform to the current years presentation.
(2) The alternatives asset class includes a range of investment products such as funds of hedge funds, funds of private equity funds and funds
of real estate funds.
(3) Assets under management or supervision for Merchant Banking and Real Estate Investing and Alternatives reflect the basis on which
management fees are earned. This calculation excludes assets under management where no management fees are earned or where the fair
value of these assets including unfunded commitments differ from the basis on which management fees are earned. Including these
assets, assets under management at March 31, 2015 and 2014 for Merchant Banking and Real Estate Investing are $40 billion and $35
billion, respectively, and for Alternatives are $39 billion and $37 billion, respectively.
(4) Amounts represent the Companys Investment Management business segments proportional share of assets managed by entities in
which it owns a minority stake.
Activity in the Companys Investment Management business segments assets under management or supervision
during the quarters ended March 31, 2015 and 2014 was as follows:
Three Months Ended
March 31,
2015
2014(1)
(dollars in billions)
$403
(2)
1
3
(1)
$377
3
(1)
2
2
6
1
2
6
3
$406
$386
107
(1) On October 1, 2014, the Managed Futures business was transferred from the Companys Wealth Management business segment to the
Companys Investment Management business segment. All prior-period amounts have been recast to conform to the current years
presentation.
(2) The alternatives asset class includes a range of investment products such as funds of hedge funds, funds of private equity funds and funds
of real estate funds.
Trading. The Company recognized a gain of $3 million in the quarter ended March 31, 2015 compared with a
loss of $20 million in the comparable period of 2014, which primarily reflected gains and losses, respectively,
related to certain consolidated real estate funds sponsored by the Company.
Investments. The Company recorded net investment gains of $152 million in the quarter ended March 31, 2015
compared with gains of $246 million in the comparable period of 2014. The decrease in the quarter ended
March 31, 2015 primarily related to lower net investment gains and lower revenues in the Companys Merchant
Banking and Real Estate Investing business due to the deconsolidation of certain legal entities associated with a
real estate fund sponsored by the Company in the second quarter of 2014.
Asset Management, Distribution and Administration Fees. Asset management, distribution and administration
fees increased 6% to $514 million in the quarter ended March 31, 2015. The increase primarily reflected higher
management and administration revenues, as a result of higher average assets under management.
The Companys assets under management increased $20 billion from $386 billion at March 31, 2014 to $406
billion at March 31, 2015, reflecting positive net flows and market appreciation.
The Company recorded net inflows of $1 billion in the quarter ended March 31, 2015, reflecting net customer
inflows in liquidity and fixed income funds, partially offset by outflows in equity and merchant banking and real
estate funds. The Company recorded net customer inflows of $6 billion in the quarter ended March 31, 2014,
primarily in equity, liquidity and alternatives funds, partially offset by outflows in fixed income funds.
Other. Other revenues were $5 million in the quarter ended March 31, 2015 as compared with $40 million in
the comparable period of 2014. The decrease reflected higher revenues associated with the Companys minority
investment in certain third-party investment managers in the prior year period.
Non-interest Expenses. Non-interest expenses of $482 million in the quarter ended March 31, 2015 were
essentially unchanged from the comparable period of 2014. Compensation and benefits expenses decreased 5%
in the quarter ended March 31, 2015 due to a decrease in amortization attributed to the accelerated vesting of
certain awards offset by a reduction of average deferral rates for discretionary incentive based awards during the
fourth quarter of 2014. Non-compensation expenses increased 6% in the quarter ended March 31, 2015, primarily
due to higher professional services expenses.
Nonredeemable Noncontrolling Interests.
Nonredeemable noncontrolling interests are primarily related to the consolidation of certain real estate funds
sponsored by the Company. Investment gains associated with noncontrolling interests in these consolidated funds
were $12 million and $70 million in the quarters ended March 31, 2015 and 2014, respectively. Nonredeemable
noncontrolling interests decreased in the quarter ended March 31, 2015 primarily due to the deconsolidation of
certain legal entities associated with a real estate fund sponsored by the Company in the second quarter of 2014.
108
109
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target
Could Be Achieved after the Requisite Service Period.
In June 2014, the FASB issued an accounting update clarifying that entities should treat performance targets that
could be met after the requisite service period of a share-based payment award as performance conditions that
affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date) for an
award where transfer to the employee is contingent upon satisfaction of the performance target until it becomes
probable that the performance target will be met. The guidance is effective for the Company beginning January 1,
2016. Early adoption is permitted. This guidance is not expected to have a material impact on the Companys
condensed consolidated financial statements.
Revenue from Contracts with Customers.
In May 2014, the FASB issued an accounting update to clarify the principles of revenue recognition, to develop a
common revenue recognition standard across all industries for U.S. GAAP and International Financial Reporting
Standards and to provide enhanced disclosures for users of the financial statements. The core principle of this
guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. On April 1, 2015, the FASB voted to propose a deferral of the effective date of this
accounting update by one year to January 1, 2018. Additionally, the FASB permits an entity to adopt this
accounting update early but not before the original effective date, beginning January 1, 2017. The Company is
currently evaluating the potential impact of adopting this accounting standard update.
110
Other Matters.
Return on Equity Goal.
The Company is aiming to improve its returns to shareholders with a goal of achieving a sustainable 10% or
more return on average common equity excluding DVA (Return on Equity) over time, subject to the successful
execution of its strategic objectives. For further information on the Companys Return on Equity goal, see Other
MattersReturn on Equity Goal in Part II, Item 7 of the 2014 Form 10-K.
U.S. Subsidiary Banks Lending Activities.
The Company provides loans to a variety of customers, from large corporate and institutional clients to high net
worth individuals, primarily through the Companys U.S. Subsidiary Banks. The Companys lending activities in
its Institutional Securities business segment primarily include corporate lending activities, in which the Company
provides loans or lending commitments to certain corporate clients. In addition to corporate lending activities, the
Institutional Securities business segment engages in other lending activities. The Companys lending activities in
its Wealth Management business segment include securities-based lending that allows clients to borrow money
against the value of qualifying securities in PLAs and residential mortgage lending. The Company expects its
lending activities to continue to grow through further penetration of the Companys Institutional Securities and
Wealth Management business segments client base.
The following table presents the Companys U.S. Subsidiary Banks lending activities included in its condensed
consolidated statements of financial condition:
At
At
March 31, 2015 December 31, 2014
(dollars in billions)
$10.1
$ 9.6
9.4
9.0
8.0
8.6
$22.8
17.0
$21.9
15.8
(1) The other lending includes activities related to commercial and residential mortgage lending, asset-backed lending, corporate loans
purchased in the secondary market, financing extended to equities and commodities customers, and loans to municipalities.
For a further discussion of the Companys credit risks, see Quantitative and Qualitative Disclosures about
Market RiskCredit Risk in Item 3. Also see Notes 7 and 11 to the Companys condensed consolidated
financial statements in Item 1 for additional information about the Companys loans and lending commitments,
respectively.
Investment SecuritiesAvailable for Sale and Held to Maturity.
During the quarters ended March 15, 2015 and 2014, the Company reported net unrealized gains of $200 million
and $74 million, net of tax, respectively, on its AFS securities portfolio. Unrealized gains in the AFS securities
portfolio are included in Accumulated other comprehensive income (loss) for all periods presented. The net
unrealized gains for the quarters ended March 31, 2015 and 2014 primarily reflected changes in interest rates.
The securities in the Companys AFS securities portfolio with an unrealized loss were not other-than-temporarily
impaired for the quarters ended March 31, 2015 and 2014. During the quarter ended March 31, 2015, the
unrealized losses (gains) on the Companys HTM securities were not material. The Company held $1.6 billion in
HTM securities at March 31, 2015, and expects to grow its HTM Investment securities portfolio.
111
Real Estate.
The Company acts as the general partner for various real estate funds and also invests in certain of these funds as
a limited partner. The Companys real estate investments at March 31, 2015 and December 31, 2014 are
described below. Such amounts exclude investments associated with certain employee deferred compensation
and co-investment plans.
At March 31, 2015 and December 31, 2014, the Companys condensed consolidated statements of financial
condition included amounts representing real estate investment assets of consolidated subsidiaries of $277
million and $262 million, respectively, including noncontrolling interests of $253 million and $240 million,
respectively, for a net amount of $24 million and $22 million, respectively. This net presentation is a non-GAAP
financial measure that the Company considers to be a useful measure for the Company and investors to use in
assessing the Companys net exposure. In addition, the Company has contractual capital commitments,
guarantees, lending facilities and counterparty arrangements with respect to real estate investments of
$283 million at March 31, 2015.
In addition to the Companys real estate investments, the Company engages in various real estate-related
activities, including origination of loans secured by commercial and residential properties. The Company also
securitizes and trades in a wide range of commercial and residential real estate and real estate-related whole
loans, mortgages and other real estate. In connection with these activities, the Company has provided, or
otherwise agreed to be responsible for, representations and warranties. Under certain circumstances, the
Company may be required to repurchase such assets or make other payments related to such assets if such
representations and warranties are breached. The Company continues to monitor its real estate-related activities
in order to manage its exposures and potential liability from these markets and businesses. See Legal
Proceedings in Part II, Item 1, and Note 11 to the Companys condensed consolidated financial statements in
Part I, Item 1, for further information.
Income Tax Matters.
During the quarter ended March 31, 2015, the Company recognized in Provision for (benefit from) income taxes
a net discrete tax benefit of $564 million attributable to its Institutional Securities business segment. This net
discrete tax benefit was primarily associated with the repatriation of non-U.S. earnings at a cost lower than
originally estimated due to an internal restructuring to simplify the Companys legal entity organization in the
U.K.
The income of certain foreign subsidiaries earned outside of the U.S. has previously been excluded from taxation
in the U.S. as a result of a provision of U.S. tax law that defers the tax charge on certain active financial services
income until such income is repatriated to the U.S. as a dividend. This provision, as well as other provisions that
allow for tax benefits from certain tax credits, expired effective for taxable years beginning on or after January 1,
2015. These provisions have sunset and been subsequently extended by Congress, with retroactive effect, on
several occasions, the most recently in 2014. The increase to the effective tax rate as a result of the expiration of
the provisions is estimated to be immaterial on a quarterly and annual basis.
New York City Tax Reform. New York City corporate tax reform (the tax reform) was signed into law on
April 13, 2015. This tax reform, effective for tax years beginning on or after January 1, 2015, is generally
consistent with the New York State tax reform that was signed into law in 2014; it merges the existing bank
franchise tax into a substantially amended general corporation franchise tax and adopts a phased-in customerbased single receipts factor for all New York City taxpayers. The tax reform mainly impacts the Companys
banking subsidiaries and the impact on the annual effective tax rate and condensed consolidated statement of
income is estimated to be immaterial on a quarterly and annual basis.
112
assets and other assets. The Company incurs losses or gains for any adjustments of these assets to fair value. A
downturn in market conditions could result in impairment charges in future periods.
For assets and liabilities measured at fair value on a non-recurring basis, fair value is determined by using
various valuation approaches. The same hierarchy as described above, which maximizes the use of observable
inputs and minimizes the use of unobservable inputs by generally requiring that the observable inputs be used
when available, is used in measuring fair value for these items.
See Note 3 to the Companys condensed consolidated financial statements in Item 1 for further information on
assets and liabilities that are measured at fair value on a non-recurring basis.
Fair Value Control Processes. The Company employs control processes to validate the fair value of its
financial instruments, including those derived from pricing models. These control processes are designed to
ensure that the values used for financial reporting are based on observable inputs wherever possible. In the event
that observable inputs are not available, the control processes are designed to assure that the valuation approach
utilized is appropriate and consistently applied and that the assumptions are reasonable.
See Note 2 to the Companys consolidated financial statements in Item 8 of the 2014 Form 10-K for additional
information regarding the Companys valuation policies, processes and procedures.
Goodwill and Intangible Assets.
Goodwill. The Company tests goodwill for impairment on an annual basis on July 1 and on an interim basis
when certain events or circumstances exist. The Company tests for impairment at the reporting unit level, which
is generally at the level of or one level below its business segments. Goodwill no longer retains its association
with a particular acquisition once it has been assigned to a reporting unit. As such, all the activities of a reporting
unit, whether acquired or organically developed, are available to support the value of the goodwill. For both the
annual and interim tests, the Company has the option to first assess qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, the
Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying
amount, then performing the two-step impairment test is not required. However, if the Company concludes
otherwise, then it is required to perform the first step of the two-step impairment test. Goodwill impairment is
determined by comparing the estimated fair value of a reporting unit with its respective carrying value. If the
estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired.
If the estimated fair value is below carrying value, however, further analysis is required to determine the amount
of the impairment. Additionally, if the carrying value of a reporting unit is zero or a negative value and it is
determined that it is more likely than not the goodwill is impaired, further analysis is required. The estimated fair
value of the reporting units is derived based on valuation techniques the Company believes market participants
would use for each of the reporting units. The estimated fair value is generally determined by utilizing a
discounted cash flow methodology or methodologies that incorporate price-to-book and price-to-earnings
multiples of certain comparable companies. At each annual goodwill impairment testing date, each of the
Companys reporting units with goodwill had a fair value that was substantially in excess of its carrying value.
Intangible Assets. Amortizable intangible assets are amortized over their estimated useful lives and are
reviewed for impairment on an interim basis when certain events or circumstances exist. An impairment exists
when the carrying amount of the intangible asset exceeds its fair value. An impairment loss will be recognized
only if the carrying amount of the intangible asset is not recoverable and exceeds its fair value. The carrying
amount of the intangible asset is not recoverable if it exceeds the sum of the expected undiscounted cash flows.
For both goodwill and intangible assets, to the extent an impairment loss is recognized, the loss establishes the
new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. For amortizable intangible
114
assets, the new cost basis is amortized over the remaining useful life of that asset. Adverse market or economic
events could result in impairment charges in future periods.
See Notes 2, 4 and 9 to the Companys consolidated financial statements in Item 8 of the 2014 Form 10-K and
Note 3 to the Companys condensed consolidated financial statements in Item 1 for additional information about
goodwill and intangible assets.
Legal and Regulatory Contingencies.
In the normal course of business, the Company has been named, from time to time, as a defendant in various
legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a
global diversified financial services institution.
Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive
damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the
primary defendants in such cases are bankrupt or in financial distress.
The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal
and informal) by governmental and self-regulatory agencies regarding the Companys business, and involving,
among other matters, sales and trading activities, financial products or offerings sponsored, underwritten or sold
by the Company, and accounting and operational matters, certain of which may result in adverse judgments,
settlements, fines, penalties, injunctions or other relief.
Accruals for litigation and regulatory proceedings are generally determined on a case-by-case basis. Where
available information indicates that it is probable a liability had been incurred at the date of the condensed
consolidated financial statements and the Company can reasonably estimate the amount of that loss, the
Company accrues the estimated loss by a charge to income. In many proceedings, however, it is inherently
difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. For
certain legal proceedings and investigations, the Company can estimate possible losses, additional losses, ranges
of loss or ranges of additional loss in excess of amounts accrued. For certain other legal proceedings and
investigations, the Company cannot reasonably estimate such losses, particularly for proceedings and
investigations where the factual record is being developed or contested or where plaintiffs or government entities
seek substantial or indeterminate damages, restitution, disgorgement or penalties. Numerous issues may need to
be resolved, including through potentially lengthy discovery and determination of important factual matters,
determination of issues related to class certification and the calculation of damages or other relief, and by
addressing novel or unsettled legal questions relevant to the proceedings or investigations in question, before a
loss or additional loss or range of loss or additional loss can be reasonably estimated for a proceeding or
investigation.
Significant judgment is required in deciding when and if to make these accruals and the actual cost of a legal
claim or regulatory fine/penalty may ultimately be materially different from the recorded accruals.
See Note 11 to the Companys condensed consolidated financial statements in Item 1 for additional information
on legal proceedings.
Income Taxes.
The Company is subject to the income and indirect tax laws of the U.S., its states and municipalities and those of
the foreign jurisdictions in which the Company has significant business operations. These tax laws are complex
and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. The
Company must make judgments and interpretations about the application of these inherently complex tax laws
when determining the provision for income taxes and the expense for indirect taxes and must also make estimates
115
about when certain items affect taxable income in the various tax jurisdictions. Disputes over interpretations of
the tax laws may be settled with the taxing authority upon examination or audit. The Company periodically
evaluates the likelihood of assessments in each taxing jurisdiction resulting from current and subsequent years
examinations, and unrecognized tax benefits related to potential losses that may arise from tax audits are
established in accordance with the guidance on accounting for unrecognized tax benefits. Once established,
unrecognized tax benefits are adjusted when there is more information available or when an event occurs
requiring a change.
The Companys provision for income taxes is composed of current and deferred taxes. Current income taxes
approximate taxes to be paid or refunded for the current period. The Companys deferred income taxes reflect the
net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and
are measured using the applicable enacted tax rates and laws that will be in effect when such differences are
expected to reverse. The Companys deferred tax balances also include deferred assets related to tax attribute
carryforwards, such as net operating losses and tax credits that will be realized through reduction of future tax
liabilities and, in some cases, are subject to expiration if not utilized within certain periods. The Company
performs regular reviews to ascertain whether deferred tax assets are realizable. These reviews include
managements estimates and assumptions regarding future taxable income and incorporate various tax planning
strategies, including strategies that may be available to utilize net operating losses before they expire. Once the
deferred tax asset balances have been determined, the Company may record a valuation allowance against the
deferred tax asset balances to reflect the amount of these balances (net of valuation allowance) that the Company
estimates it is more likely than not to realize at a future date. Both current and deferred income taxes could
reflect adjustments related to the Companys unrecognized tax benefits.
Significant judgment is required in estimating the consolidated provision for (benefit from) income taxes, current
and deferred tax balances (including valuation allowance, if any), accrued interest or penalties and uncertain tax
positions. Revisions in our estimates and/or the actual costs of a tax assessment may ultimately be materially
different from the recorded accruals and unrecognized tax benefits, if any.
See Note 2 to the Companys consolidated financial statements in Item 8 of the 2014 Form 10-K for additional
information on the Companys significant assumptions, judgments and interpretations associated with the
accounting for income taxes and Note 17 to the Companys condensed consolidated financial statements in
Item 1 for additional information on the Companys tax examinations.
116
Assets
Cash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Cash deposited with clearing organizations or segregated
under federal and other regulations or requirements(2) . . .
Trading assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities received as collateral(2) . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell(2) . . . . . . . .
Securities borrowed(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer and other receivables(2) . . . . . . . . . . . . . . . . . . . . .
Loans, net of allowance(4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
(2)
(3)
(4)
Total
$ 19,813
$ 20,031
$ 449
$ 40,293
37,977
254,385
11,182
22,328
80,974
149,970
35,198
28,747
18,359
2,363
1,248
58,280
10,258
395
20,967
39,956
10,732
3,527
568
1,392
40,340
259,160
69,462
22,328
91,232
150,365
56,733
68,703
30,483
$658,933
$164,230
$5,936
$829,099
Cash and cash equivalents include Cash and due from banks and Interest bearing deposits with banks.
Certain of these assets are included in secured financing assets (see Secured Financing herein).
Investment securities include both AFS and HTM securities.
Amounts include loans held for sale and loans held for investment but exclude loans at fair value, which are included in Trading assets in
the Companys condensed consolidated statements of financial condition (see Note 7 to the Companys condensed consolidated financial
statements in Item 1).
(5) Other assets include Other investments; Premises, equipment and software costs; Goodwill; Intangible assets; and Other assets.
(6) Total assets include Global Liquidity Reserve of $195 billion at March 31, 2015.
117
Institutional
Securities
Assets
Cash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Cash deposited with clearing organizations or segregated
under federal and other regulations or requirements(2) . . .
Trading assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities received as collateral(2) . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell(2) . . . . . . . .
Securities borrowed(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer and other receivables(2) . . . . . . . . . . . . . . . . . . . . .
Loans, net of allowance(4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
$ 23,161
$ 23,363
$ 460
$ 46,984
37,841
252,021
11,999
21,316
73,299
136,336
27,328
28,755
18,285
2,766
1,300
57,317
9,989
372
21,022
37,822
11,196
3,480
611
1,471
40,607
256,801
69,316
21,316
83,288
136,708
48,961
66,577
30,952
$630,341
$165,147
$6,022
$801,510
(1)
(2)
(3)
(4)
Cash and cash equivalents include Cash and due from banks and Interest bearing deposits with banks.
Certain of these assets are included in secured financing assets (see Secured Financing herein).
Investment securities include both AFS securities and HTM securities.
Amounts include loans held for sale and loans held for investment but exclude loans at fair value, which are included in Trading assets in
the Companys condensed consolidated statements of financial condition (see Note 7 to the Companys condensed consolidated financial
statements in Item 1).
(5) Other assets include Other investments; Premises, equipment and software costs; Goodwill; Intangible assets; and Other assets.
(6) Total assets include Global Liquidity Reserve of $193 billion at December 31, 2014.
A substantial portion of the Companys total assets consists of liquid marketable securities and short-term
receivables arising principally from sales and trading activities in the Companys Institutional Securities business
segment. The liquid nature of these assets provides the Company with flexibility in managing the size of its
balance sheet. The Companys total assets increased to $829 billion at March 31, 2015 from $802 billion at
December 31, 2014. The increase in total assets was primarily due to an increase in Trading assets, primarily due
to increases in U.S. government and agency securities, Securities purchased under agreements to resell,
Securities borrowed and Customer and other receivables, partially offset by a decrease in Interest bearing
deposits with banks.
The Companys assets and liabilities are primarily related to transactions attributable to sales and trading and
securities financing activities. At March 31, 2015, securities financing assets and liabilities were $347 billion and
$298 billion, respectively. At December 31, 2014, securities financing assets and liabilities were $320 billion and
$295 billion, respectively. Securities financing transactions include Cash deposited with clearing organizations or
segregated under federal and other regulations or requirements, repurchase and resale agreements, Securities
borrowed and loaned transactions, Securities received as collateral and obligations to return securities received,
and Customer and other receivables and payables. Securities borrowed or purchased under agreements to resell
and securities loaned or sold under agreements to repurchase are treated as collateralized financings (see Notes 2
and 5 to the Companys condensed consolidated financial statements in Item 1). Securities sold under agreements
to repurchase and Securities loaned were $87 billion at March 31, 2015 and averaged $101 billion during the
quarter ended March 31, 2015. Securities sold under agreements to repurchase and Securities loaned period-end
balances were lower than the average balances during 2015 as there was a reduction in secured financing
requirements. Securities purchased under agreements to resell and Securities borrowed were $242 billion at
March 31, 2015 and averaged $251 billion during the quarter ended March 31, 2015.
Securities financing assets and liabilities also include matched book transactions with minimal market, credit
and/or liquidity risk. Matched book transactions accommodate customers, as well as obtain securities for the
settlement and financing of inventory positions. The customer receivable portion of the securities financing
118
transactions includes customer margin loans, collateralized by customer-owned securities, and customer cash,
which is segregated in accordance with regulatory requirements. The customer payable portion of the securities
financing transactions primarily includes customer payables to the Companys prime brokerage customers. The
Companys risk exposure on these transactions is mitigated by collateral maintenance policies that limit the
Companys credit exposure to customers. Included within securities financing assets were $22 billion at
March 31, 2015 and $21 billion at December 31, 2014, recorded in accordance with accounting guidance for the
transfer of financial assets that represented offsetting assets and liabilities for fully collateralized non-cash loan
transactions.
Liquidity Risk Management Framework.
The primary goal of the Companys liquidity risk management framework is to ensure that the Company has
access to adequate funding across a wide range of market conditions. The framework is designed to enable the
Company to fulfill its financial obligations and support the execution of the Companys business strategies.
The following principles guide the Companys liquidity risk management framework:
Sufficient liquid assets should be maintained to cover maturing liabilities and other planned and
contingent outflows;
Maturity profile of assets and liabilities should be aligned, with limited reliance on short-term funding;
Source, counterparty, currency, region, and term of funding should be diversified; and
Contingency Funding Plan (CFP) should anticipate, and account for, periods of limited access to
funding.
The core components of the Companys liquidity risk management framework are the CFP, Liquidity Stress
Tests and the Global Liquidity Reserve, which support the Companys target liquidity profile.
Contingency Funding Plan.
The Companys CFP describes the data and information flows, limits, targets, operating environment indicators,
escalation procedures, roles and responsibilities, and available mitigating actions in the event of a liquidity stress.
The CFP also sets forth the principal elements of the Companys liquidity stress testing, which identifies stress
events of different severity and duration, assesses current funding sources, and uses and establishes a plan for
monitoring and managing a potential liquidity stress event.
Liquidity Stress Tests.
The Company uses Liquidity Stress Tests to model liquidity outflows across multiple scenarios over a range of
time horizons. These scenarios contain various combinations of idiosyncratic and systemic stress events.
The assumptions underpinning the Liquidity Stress Tests include, but are not limited to, the following:
No government support;
No access to equity and unsecured debt markets;
Repayment of all unsecured debt maturing within the stress horizon;
Higher haircuts and significantly lower availability of secured funding;
Additional collateral that would be required by trading counterparties, certain exchanges and clearing
organizations related to credit rating downgrades;
Additional collateral that would be required due to collateral substitutions, collateral disputes and
uncalled collateral;
119
$ 11
25
$ 12
30
80
36
24
19
76
32
26
1
16
$195
$193
120
(1) Non-U.S. sovereign obligations are composed of unencumbered German, French, Dutch, U.K., Brazilian and Japanese government
obligations.
The ability to monetize assets during a liquidity crisis is critical. The Company believes that the assets held in its
Global Liquidity Reserve can be monetized within five business days in a stressed environment given the highly
liquid and diversified nature of the reserves. The currency profile of the Companys Global Liquidity Reserve is
consistent with the Companys CFP and Liquidity Stress Tests. In addition to its Global Liquidity Reserve, the
Company has other cash and cash equivalents and other unencumbered assets that are available for monetization
that are not included in the balances in the table above.
Global Liquidity Reserve Managed by Bank and Non-Bank Legal Entities.
The table below summarizes period-end and average balances of the Companys Global Liquidity Reserve
managed by bank and non-bank legal entities:
At
March 31,
2015
81
5
Average Balance(1)
For the Three
Months Ended
At
March 31,
December 31,
2014
2015
2014
(dollars in billions)
83
5
82
5
85
5
86
88
87
90
76
33
70
35
77
32
77
33
109
105
109
110
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
195
193
196
200
(1) The Company calculates the average Global Liquidity Reserve based upon daily amounts.
(2) The Parent managed $55 billion at both March 31, 2015 and December 31, 2014, and averaged $58 billion and $57 billion during
quarters ended March 31, 2015 and 2014, respectively.
are required to maintain a minimum U.S. LCR of 80%. This minimum requirement will increase to 90%
beginning on January 1, 2016 and will be fully phased in at 100% beginning on January 1, 2017. The Company
and its U.S. Subsidiary Banks must calculate their respective U.S. LCR on a monthly basis during the period
between January 1, 2015 and June 30, 2015 and on each business day starting on July 1, 2015. The Company is
well in compliance with the minimum required U.S. LCR based on current estimates and interpretation and
continues to evaluate its potential impact on the Companys liquidity and funding requirements.
Net Stable Funding Ratio. The NSFR is defined as the ratio of the amount of variable stable funding to the
amount of required stable funding. The standards objective is to reduce funding risk over a one-year horizon by
requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to
mitigate the risk of future funding stress. In October 2014, the Basel Committee finalized revisions to the original
December 2010 version of the NSFR. The U.S. banking agencies are expected to issue a proposal to implement
the NSFR in the U.S. The Company continues to evaluate the NSFR and its potential impact on the Companys
current liquidity and funding requirements.
Funding Management.
The Company manages its funding in a manner that reduces the risk of disruption to the Companys operations.
The Company pursues a strategy of diversification of secured and unsecured funding sources (by product, by
investor and by region) and attempts to ensure that the tenor of the Companys liabilities equals or exceeds the
expected holding period of the assets being financed.
The Company funds its balance sheet on a global basis through diverse sources. These sources may include the
Companys equity capital, long-term debt, repurchase agreements, securities lending, deposits, commercial
paper, letters of credit and lines of credit. The Company has active financing programs for both standard and
structured products targeting global investors and currencies.
Secured Financing.
A substantial portion of the Companys total assets consists of liquid marketable securities and arises principally
from its Institutional Securities business segments sales and trading activities. The liquid nature of these assets
provides the Company with flexibility in funding these assets with secured financing. The Companys goal is to
achieve an optimal mix of durable secured and unsecured financing. Secured financing investors principally
focus on the quality of the eligible collateral posted. Accordingly, the Company actively manages its secured
financing book based on the quality of the assets being funded.
The Company utilizes shorter-term secured financing only for highly liquid assets and has established longer
tenor limits for less liquid asset classes, for which funding may be at risk in the event of a market disruption. The
Company defines highly liquid assets as government-issued or government-guaranteed securities with a high
degree of fundability and less liquid assets as those that do not meet this criteria. At March 31, 2015 and
December 31, 2014, the weighted average maturity of the Companys secured financing against less liquid assets
was greater than 120 days. To further minimize the refinancing risk of secured financing for less liquid assets, the
Company has established concentration limits to diversify its investor base and reduce the amount of monthly
maturities for secured financing of less liquid assets. Furthermore, the Company obtains term secured funding
liabilities in excess of less liquid inventory, or spare capacity, as an additional risk mitigant to replace maturing
trades in the event that secured financing markets or the Companys ability to access them become limited.
Finally, in addition to the above risk management framework, the Company holds a portion of its Global
Liquidity Reserve against the potential disruption to its secured financing capabilities.
The Company also maintains a pool of liquid and easily fundable securities, which provide a valuable future
source of liquidity. With the implementation of U.S. Basel III liquidity standards, the Company has also
122
incorporated high quality liquid asset classifications that are consistent with the U.S. LCR definitions into its
encumbrance reporting, which further substantiates the demonstrated liquidity characteristics of the
unencumbered asset pool and the Companys ability to readily identify new funding sources for such assets.
Unsecured Financing.
The Company views long-term debt and deposits as stable sources of funding. Unencumbered securities and nonsecurity assets are financed with a combination of long-term and short-term debt and deposits. The
Companys unsecured financings include structured borrowings, whose payments and redemption values
are based on the performance of certain underlying assets, including equity, credit, foreign exchange, interest
rates and commodities. When appropriate, the Company may use derivative products to conduct asset and
liability management and to make adjustments to the Companys interest rate and structured borrowings risk
profile (see Note 12 to the Companys condensed consolidated financial statements in Item 1).
Short-Term Borrowings.
The Companys unsecured Short-term borrowings may consist of bank loans, bank notes, commercial paper and
structured notes with maturities of 12 months or less at issuance. At March 31, 2015 and December 31, 2014, the
Company had approximately $2,879 million and $2,261 million, respectively, in Short-term borrowings.
Deposits.
Available funding sources to the Companys bank subsidiaries include time deposits, money market deposit
accounts, demand deposit accounts, repurchase agreements, federal funds purchased, commercial paper and
Federal Home Loan Bank advances. The vast majority of deposits in the Companys U.S. Subsidiary Banks are
sourced from the Companys retail brokerage accounts and are considered to have stable, low-cost funding
characteristics. During the quarter ended March 31, 2015, $4 billion of deposits held by Citi relating to the
Companys customer accounts from its acquisition of the Wealth Management JV (see Note 3 to the Companys
consolidated financial statements in Item 8 of the 2014 Form 10-K) were transferred to the Companys
depository institutions. At March 31, 2015, approximately $4 billion of additional deposits are scheduled to be
transferred to the Companys depository institutions on an agreed-upon basis through June 2015.
Deposits were as follows:
At
At
March 31, 2015(1) December 31, 2014(1)
(dollars in millions)
$134,263
1,552
$132,159
1,385
Total(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$135,815
$133,544
(1) Total deposits subject to FDIC insurance at March 31, 2015 and December 31, 2014 were $101 billion and $99 billion, respectively.
(2) Certain time deposit accounts are carried at fair value under the fair value option (see Note 3 to the Companys condensed consolidated
financial statements in Item 1).
(3) At March 31, 2015 and December 31, 2014, approximately $130 billion and $128 billion, respectively, were attributed to the Companys
Wealth Management business segment. These total deposits exclude deposits held by Citi relating to the Companys customer accounts.
Senior Indebtedness.
At March 31, 2015 and December 31, 2014, the aggregate outstanding carrying amount of the Companys senior
indebtedness (including guaranteed obligations of the indebtedness of subsidiaries) was approximately $144
billion and $142 billion, respectively.
123
Long-Term Borrowings.
The Company believes that accessing debt investors through multiple distribution channels helps provide
consistent access to the unsecured markets. In addition, the issuance of long-term debt allows the Company to
reduce reliance on short-term credit sensitive instruments (e.g., commercial paper and other unsecured short-term
borrowings). Long-term borrowings are generally managed to achieve staggered maturities, thereby mitigating
refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients
across regions, currencies and product types. Availability and cost of financing to the Company can vary
depending on market conditions, the volume of certain trading and lending activities, the Companys credit
ratings and the overall availability of credit.
The Company may engage in various transactions in the credit markets (including, for example, debt retirements)
that it believes are in the best interests of the Company and its investors.
Long-term borrowings by maturity profile at March 31, 2015 consisted of the following:
Parent
Subsidiaries
Total
(dollars in millions)
Due in 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,713
18,206
21,603
16,516
15,771
59,528
$2,701
1,587
1,209
853
843
2,015
$ 17,414
19,793
22,812
17,369
16,614
61,543
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$146,337
$9,208
$155,545
During the quarter ended March 31, 2015, the Company issued notes with a principal amount of approximately
$11.3 billion. In connection with these note issuances, the Company generally enters into certain transactions to
obtain floating interest rates. The weighted average maturity of the Companys long-term borrowings, based
upon stated maturity dates, was approximately 6.3 years at March 31, 2015. During the quarter ended March 31,
2015, approximately $5.3 billion in aggregate long-term borrowings matured or were retired. Subsequent to
March 31, 2015 and through April 30, 2015, the Companys long-term borrowings decreased by approximately
$0.1 billion. This amount includes the Companys issuance of $2.0 billion in subordinated debt on April 23,
2015. For a further discussion of the Companys long-term borrowings see Note 9 to the Companys condensed
consolidated financial statements in Item 1.
Capital Trusts.
On April 27, 2015, the Company announced that Morgan Stanley Capital Trust VI will redeem all of the issued
and outstanding $862.5 million aggregate liquidation amount of its 6.60% Capital Securities on May 27, 2015,
and that Morgan Stanley Capital Trust VII will redeem all of the issued and outstanding $1,100 million aggregate
liquidation amount of its 6.60% Capital Securities on May 12, 2015.
Credit Ratings.
The Company relies on external sources to finance a significant portion of its day-to-day operations. The cost and
availability of financing generally are impacted by, among other things, the Companys credit ratings. In
addition, the Companys credit ratings can have an impact on certain trading revenues, particularly in those
businesses where longer-term counterparty performance is a key consideration, such as OTC derivative
transactions, including credit derivatives and interest rate swaps. Rating agencies consider company-specific
factors; other industry factors such as regulatory or legislative changes; the macroeconomic environment; and
perceived levels of government support, among other things.
Some rating agencies have stated that they currently incorporate various degrees of credit rating uplift from
external sources of potential support, as well as perceived government support of systemically important banks,
including the credit ratings of the Company. Rating agencies continue to monitor the progress of U.S. financial
reform legislation and regulations to assess whether the possibility of extraordinary government support for the
124
financial system in any future financial crises is negatively impacted. Legislative and rulemaking outcomes may
lead to reduced uplift assumptions for U.S. banks and, thereby, place downward pressure on credit ratings. At the
same time, proposed and final U.S. financial reform legislation and attendant rulemaking, such as higher
standards for capital and liquidity levels, also have positive implications for credit ratings. The net result on
credit ratings and the timing of any change in rating agency views on changes in potential government support
and financial reform efforts are currently uncertain.
At April 30, 2015, the Parents and Morgan Stanley Bank, N.A.s senior unsecured ratings were as set forth
below:
Short-Term
Debt
Parent
Long-Term
Debt
a-1
A-2
A
A-
Rating
Outlook
Stable
Stable
Under
Review
Negative
Negative
F1
P-2
A
A3
A-1
Stable
Under
Review
Stable
(1) On March 17, 2015, Moodys Investors Service (Moodys) placed all long-term ratings of the Company and its subsidiaries on review
for upgrade.
In connection with certain OTC trading agreements and certain other agreements where the Company is a
liquidity provider to certain financing vehicles associated with the Companys Institutional Securities business
segment, the Company may be required to provide additional collateral or immediately settle any outstanding
liability balances with certain counterparties or pledge additional collateral to certain exchanges and clearing
organizations in the event of a future credit rating downgrade irrespective of whether the Company is in a net
asset or net liability position.
The additional collateral or termination payments that may be called in the event of a future credit rating
downgrade vary by contract and can be based on ratings by either or both of Moodys Investors Service and
Standard & Poors Ratings Services (S&P). At March 31, 2015, the future potential collateral amounts and
termination payments that could be called or required by counterparties or exchanges and clearing organizations
in the event of one-notch or two-notch downgrade scenarios, from the lowest of Moodys or S&P ratings, based
on the relevant contractual downgrade triggers were $1,697 million and an incremental $3,017 million,
respectively. At December 31, 2014, the comparative requirements were $1,856 million and an incremental
$2,984 million, respectively.
While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact
it will have on the Companys business and results of operation in future periods is inherently uncertain and will
depend on a number of interrelated factors, including, among others, the magnitude of the downgrade, the rating
relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future
mitigating actions the Company may take. The liquidity impact of additional collateral requirements is included
in the Companys Liquidity Stress Tests.
Capital Management.
The Companys senior management views capital as an important source of financial strength. The Company
actively manages its consolidated capital position based upon, among other things, business opportunities, risks,
capital availability and rates of return together with internal capital policies, regulatory requirements and rating
agency guidelines and, therefore, in the future may expand or contract its capital base to address the changing
needs of its businesses. The Company attempts to maintain total capital, on a consolidated basis, at least equal to
the sum of its operating subsidiaries required equity.
125
In March 2015, the Company received no objection from the Federal Reserve to its 2015 capital plan. The
Capital plan included a share repurchase of up to $3.1 billion of the Companys outstanding common stock
beginning in the second quarter of 2015 through the end of the second quarter of 2016. Additionally, the capital
plan included an increase in the Companys quarterly common stock dividend to $0.15 per share from $0.10 per
share, beginning with the dividend declared on April 20, 2015. During the quarter ended March 31, 2015 and
2014, the Company repurchased approximately $250 million and $150 million, respectively, of the Companys
outstanding common stock as part of its share repurchase program (see Note 13 to the Companys condensed
consolidated financial statements in Item 1).
The Company has sufficient authorization for the proposed share repurchases pursuant to the capital plan under
its existing share repurchase program for capital management purposes. Pursuant to the share repurchase
program, the Company considers, among other things, business segment capital needs as well as equity-based
compensation and benefit plan requirements. Share repurchases under the Companys program will be exercised
from time to time at prices the Company deems appropriate subject to various factors, including the Companys
capital position and market conditions. The share repurchases may be effected through open market purchases or
privately negotiated transactions, including through Rule 10b5-1 plans, and may be suspended at any time. Share
repurchases by the Company are subject to regulatory approval (see also Unregistered Sales of Equity Securities
and Uses of Proceeds in Part II, Item 2).
The Companys Board of Directors determines the declaration and payment of dividends on a quarterly basis. On
April 20, 2015, the Company announced that its Board of Directors had declared a quarterly dividend per
common share of $0.15. The dividend is payable on May 15, 2015 to common shareholders of record on
April 30, 2015 (see Note 20 to the Companys condensed consolidated financial statements in Item 1).
Issuance of Preferred Stock.
Series J Preferred Stock. On March 19, 2015, the Company issued 1,500,000 Depositary Shares for an
aggregate price of $1,500 million. Each Depositary Share represents a 1/25th interest in a share of perpetual
Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series J, $0.01 par value (Series J Preferred Stock).
The Series J Preferred Stock is redeemable at the Companys option (i) in whole or in part, from time to time, on
any dividend payment date on or after July 15, 2020 or (ii) in whole but not in part at any time within 90 days
following a regulatory capital treatment event (as described in the terms of that series), in each case at a
redemption price of $25,000 per share (equivalent to $1,000 per Depository Share), plus any declared and unpaid
dividends to, but excluding, the date fixed for redemption, without accumulation of any undeclared dividends.
The Series J Preferred Stock also has a preference over the Companys common stock upon liquidation. The
Series J Preferred Stock offering (net of related issuance costs) resulted in proceeds of approximately $1,493
million.
126
On March 17, 2015, the Company announced that its Board of Directors declared, a quarterly dividend, for
preferred stock shareholders of record on March 31, 2015, that was paid on April 15, 2015 as follows:
Quarterly
Dividend
Per Share(1)
Series
445.31
429.69
414.06
398.44
$250.00
25.00
(1) The Company has outstanding Series H and Series J Preferred Stock, for which a dividend declaration date did not occur during the first
quarter of 2015, in accordance with the terms thereof.
Tangible Equity.
The following table sets forth tangible Morgan Stanley shareholders equity and tangible common equity at
March 31, 2015 and December 31, 2014 and average tangible Morgan Stanley shareholders equity and average
tangible common equity for the quarters ended March 31, 2015 and 2014:
Average Balance(1)
For the Three
Months Ended
March 31,
Balance at
March 31, December 31,
2015
2014
2015
(dollars in millions)
Common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Morgan Stanley shareholders equity . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures issued to capital trusts . . . . . . . . . .
Less: Goodwill and net intangible assets(2) . . . . . . . . . . . . . . . . . . .
$66,642
7,520
74,162
4,873
(9,657)
$64,880
6,020
70,900
4,868
(9,742)
$65,590
6,395
71,895
4,871
(9,702)
2014
$63,264
3,220
66,484
4,857
(9,837)
$69,378
$66,026
$67,154
$61,504
Common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Goodwill and net intangible assets(2) . . . . . . . . . . . . . . . . . . .
$66,642
(9,657)
$64,880
(9,742)
$65,590 $63,264
(9,702) (9,837)
$56,985
$55,138
$55,888
$53,427
(1) The Company calculates its average balances based upon month-end balances.
(2) The deduction for Goodwill and net intangible assets is partially offset by mortgage servicing rights (MSR) (net of disallowable MSR)
of $5 million and $6 million at March 31, 2015 and December 31, 2014, respectively.
(3) Tangible Morgan Stanley shareholders equity, and tangible common equity, non-GAAP financial measures, equals Morgan Stanley
shareholders equity or common equity, respectively, less goodwill and net intangible assets as defined above. The Company views
tangible Morgan Stanley shareholders equity and tangible common equity as a useful measure to the Company and investors to assess
capital adequacy.
127
Capital Covenants.
In October 2006 and April 2007, the Company executed replacement capital covenants in connection with
offerings by Morgan Stanley Capital Trust VII and Morgan Stanley Capital Trust VIII (the Capital Securities),
which become effective after the scheduled redemption date in 2046. Under the terms of the replacement capital
covenants, the Company has agreed, for the benefit of certain specified holders of debt, to limitations on its
ability to redeem or repurchase any of the Capital Securities for specified periods of time. For a complete
description of the Capital Securities and the terms of the replacement capital covenants, see the Companys
Current Reports on Form 8-K dated October 12, 2006 and April 26, 2007.
Regulatory Requirements.
Regulatory Capital Framework.
The Company is a financial holding company under the Bank Holding Company Act of 1956, as amended, and is
subject to the regulation and oversight of the Federal Reserve. The Federal Reserve establishes capital
requirements for the Company, including well-capitalized standards, and evaluates the Companys compliance
with such capital requirements. The Office of the Comptroller of the Currency (OCC) establishes similar
capital requirements and standards for the Companys U.S. Subsidiary Banks.
Implementation of U.S. Basel III.
The U.S. banking regulators have comprehensively revised their risk-based and leverage capital framework to
implement many aspects of the Basel III capital standards established by the Basel Committee. The U.S. banking
regulators revised capital framework is referred to herein as U.S. Basel III. The Company and its U.S.
Subsidiary Banks became subject to U.S. Basel III on January 1, 2014. Aspects of U.S. Basel III, such as the
minimum risk-based capital ratio requirements, new capital buffers, and certain deductions from and adjustments
to capital, will be phased in over several years.
Regulatory Capital. Under U.S. Basel III, new items (including certain investments in the capital instruments
of unconsolidated financial institutions) are deducted from the respective tiers of regulatory capital, and certain
existing regulatory deductions and adjustments are modified or are no longer applicable. The majority of these
capital deductions are subject to a phase-in schedule and will be fully phased in by 2018. Unrealized gains and
losses on AFS securities are reflected in Common Equity Tier 1 capital, subject to a phase-in schedule. The
percentage of the regulatory deductions and adjustments to Common Equity Tier 1 capital that applied to the
Company at March 31, 2015 and December 31, 2014 ranged from 20% to 100%, depending on the specific item.
U.S. Basel III, which is aimed at increasing the quality and amount of regulatory capital, establishes Common
Equity Tier 1 capital as a new tier of capital, increases minimum required risk-based capital ratios, provides for
capital buffers above those minimum ratios, provides for new regulatory capital deductions and adjustments,
modifies methods for calculating RWAsthe denominator of risk-based capital ratiosby, among other things,
increasing counterparty credit risk capital requirements, and introduces a supplementary leverage ratio.
In addition, U.S. Basel III narrows the eligibility criteria for regulatory capital instruments. As a result of these
revisions, existing trust preferred securities will be fully phased-out of the Companys Tier 1 capital by
January 1, 2016. Thereafter, existing trust preferred securities that do not satisfy U.S. Basel IIIs eligibility
criteria for Tier 2 capital will be phased out of the Companys regulatory capital by January 1, 2022.
128
Risk-Weighted Assets. The Company is required to calculate and hold capital against credit, market and
operational risk RWAs. RWAs reflect both on- and off-balance sheet risk of the Company. Credit risk RWAs
reflect capital charges attributable to the risk of loss arising from a borrower or counterparty failing to meet its
financial obligations. Market risk RWAs reflect capital charges attributable to the risk of loss resulting from
adverse changes in market prices and other factors. For a further discussion of the Companys market and credit
risks, see Quantitative and Qualitative Disclosures about Market Risk in Item 3. Operational risk RWAs reflect
capital charges attributable to the risk of loss resulting from inadequate or failed processes, people and systems or
from external events (e.g., fraud, theft, legal and compliance risks or damage to physical assets). The Company
may incur operational risks across the full scope of its business activities, including revenue-generating activities
(e.g., sales and trading) and control groups (e.g., information technology and trade processing). In addition, given
the evolving regulatory and litigation environment across the financial services industry and that operational risk
RWAs incorporate the impact of such related matters, operational risk RWAs may increase in future periods.
The Basel Committee is in the process of considering revisions to various provisions of the Basel III framework
that, if adopted by the U.S. banking agencies, could result in substantial changes to U.S. Basel III. In particular,
the Basel Committee has finalized a new methodology for calculating counterparty credit risk exposures, the
standardized approach for measuring counterparty credit risk exposures (SA-CCR); has finalized a revised
framework establishing capital requirements for securitizations; and has proposed revisions to various regulatory
capital standards, including for trading and banking book exposures, the credit risk framework and capital floors.
In each case, the impact of these revised standards on the Company and its U.S. Subsidiary Banks is uncertain
and depends on future rulemakings by the U.S. banking agencies.
Calculation of Risk-Based Capital Ratios. On February 21, 2014, the Federal Reserve and the OCC approved
the Companys and its U.S. Subsidiary Banks respective use of the U.S. Basel III advanced internal ratingsbased approach for determining credit risk capital requirements and advanced measurement approaches for
determining operational risk capital requirements to calculate and publicly disclose their risk-based capital ratios
beginning with the second quarter of 2014, subject to the capital floor discussed below (the Advanced
Approach). As an Advanced Approach banking organization, the Company is required to compute risk-based
capital ratios using both (i) standardized approaches for calculating credit risk RWAs and market risk RWAs (the
Standardized Approach); and (ii) an advanced internal ratings-based approach for calculating credit risk
RWAs, an advanced measurement approach for calculating operational risk RWAs, and an advanced approach
for calculating market risk RWAs under U.S. Basel III.
To implement a provision of the Dodd-Frank Act, U.S. Basel III subjects Advanced Approach banking
organizations that have been approved by their regulators to exit the parallel run, such as the Company, to a
permanent capital floor. In 2014, as a result of the capital floor, an Advanced Approach banking organizations
binding risk-based capital ratios were the lower of its ratios computed under the Advanced Approach or U.S.
Basel I as supplemented by Basel 2.5. Beginning on January 1, 2015, the Companys binding risk-based capital
ratios are the lower of the capital ratios computed under the Advanced Approach or the Standardized Approach
under U.S. Basel III. The U.S. Basel III Standardized Approach modifies certain U.S. Basel I-based methods for
calculating RWAs and prescribes new standardized risk weights for certain types of assets and exposures. The
capital floor applies to the calculation of the minimum risk-based capital requirements as well as the capital
conservation buffer, the countercyclical capital buffer (if deployed by banking regulators), and, if adopted, the
proposed global systemically important bank (G-SIB) buffer.
The methods for calculating each of the Companys risk-based capital ratios will change through January 1, 2022
as U.S. Basel IIIs revisions to the numerator and denominator are phased in and as the Company calculates
RWAs using the Advanced Approach and the Standardized Approach. These ongoing methodological changes
may result in differences in the Companys reported capital ratios from one reporting period to the next that are
independent of changes to the Companys capital base, asset composition, off-balance sheet exposures or risk
profile.
129
The basis for the calculation of the Companys U.S. Basel III capital ratios, on a transitional and fully phased-in
basis, are presented below:
Transition Period
Second to Fourth
Quarter of 2014
2015 to 2017
Fully Phased-In(1)
Advanced Approach(4) . . . .
Denominator of leverage
ratios . . . . . . . . . . . . . . . . . . . Tier 1 Leverage Ratio . . . . . .
Supplementary Leverage
Ratio(6) . . . . . . . . . . . . . . .
(1) By the beginning of 2018, U.S. Basel III rules defining capital (numerator of capital ratios) will be fully phased-in, except for the
exclusion of non-qualifying trust preferred securities from Tier 2 capital, which will be fully phased-in as of January 1, 2022. In addition,
the Company will also be subject to a greater than 2.5% Common Equity Tier 1 capital conservation buffer, a G-SIB capital surcharge (if
adopted) and, if deployed by banking regulators, up to a 2.5% Common Equity Tier 1 countercyclical buffer, all of which will be fully
phased in by the beginning of 2019. The capital conservation buffer, the G-SIB capital surcharge and, if deployed, the countercyclical
buffer apply in addition to each of the Companys Common Equity Tier 1, Tier 1 and Total capital ratios. The requirements for these
additional capital buffers will be phased in beginning in 2016.
(2) Beginning June 30, 2014, as a result of the Companys and its U.S. Subsidiary Banks completion of the Advanced Approach parallel
run, the amount of expected credit loss that exceeds eligible credit reserves must be deducted 20% from Common Equity Tier 1 capital
and 80% from Additional Tier 1 capital. Over the next several years, this deduction from Common Equity Tier 1 capital will
incrementally increase and the amount deducted from Additional Tier 1 capital will correspondingly decrease, until fully phased in by the
beginning of 2018. In addition, under the Advanced Approach framework, the allowance for loan losses cannot be included in Tier 2
capital. Instead, an Advanced Approach banking organization may include in Tier 2 capital any eligible credit reserves that exceed its
total expected credit losses to the extent that the excess reserve amount does not exceed 0.6% of its Advanced Approach credit risk
RWAs. The allowance for loan losses may continue to be included in Tier 2 capital for purposes of calculating capital ratios under U.S.
Basel I as supplemented by Basel 2.5 and under the Standardized Approach, up to 1.25% of credit risk RWAs.
(3) Beginning in 2015, the Company is required to calculate credit risk RWAs and market risk RWAs under the U.S. Basel III Standardized
Approach.
(4) Public reporting of Advanced Approach capital ratios began during the second quarter of 2014.
(5) In accordance with U.S. Basel III, adjusted average assets represent the denominator of the Tier 1 leverage ratio and were composed of
the Companys average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter, adjusted for
disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain financial equity investments and other adjustments.
(6) Beginning on January 1, 2015, the Company is required to publicly disclose its supplementary leverage ratio, which will become
effective as a capital standard on January 1, 2018.
130
Regulatory Capital Ratios. The Company is required to calculate capital ratios under both the Advanced
Approach and the Standardized Approach, in both cases subject to transitional provisions. The following table
presents the Companys regulatory capital ratios at March 31, 2015, as well as the minimum required regulatory
capital ratios applicable under U.S. Basel III in 2015.
At March 31, 2015
Actual Capital Ratio
U.S. Basel III Transitional/ U.S. Basel III Transitional/
Standardized Approach
Advanced Approach
13.1%
14.8%
17.7%
7.8%
Minimum Regulatory
Capital Ratio(1)
2015
13.1%
14.7%
17.5%
7.8%
4.5%
6.0%
8.0%
4.0%
(1) Percentages represent minimum regulatory capital ratios for calendar year 2015 under U.S. Basel III.
(2) Tier 1 leverage ratio equals Tier 1 capital (calculated under U.S. Basel III transitional rules) divided by the average daily balance of
consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter, adjusted for disallowed goodwill, transitional
intangible assets, certain deferred tax assets, certain financial equity investments and other adjustments.
Beginning on January 1, 2015, for the Company to remain a financial holding company, its U.S. Subsidiary
Banks must qualify as well-capitalized under the higher capital requirements of U.S. Basel III by maintaining a
total risk-based capital ratio (total capital to risk-weighted assets) of at least 10%, a Tier 1 risk-based capital ratio
of at least 8%, a Common Equity Tier 1 risk-based capital ratio of at least 6.5%, and a Tier 1 leverage ratio (Tier
1 capital to average total consolidated assets minus certain amounts deducted from Tier 1 capital) of at least 5%.
The Federal Reserve has not yet revised the well-capitalized standard for financial holding companies to reflect
the higher capital standards in U.S. Basel III. Assuming that the Federal Reserve would apply the same or very
similar well-capitalized standards to financial holding companies, each of the Companys risk-based capital
ratios and Tier 1 leverage ratio at March 31, 2015 would have exceeded the revised well-capitalized standard.
The Federal Reserve may require the Company and its peer financial holding companies to maintain risk and
leverage-based capital ratios substantially in excess of mandated minimum levels, depending upon general
economic conditions and a financial holding companys particular condition, risk profile and growth plans.
At March 31, 2015, the capital ratios calculated under the U.S. Basel III Advanced Approach were lower than
those calculated under the U.S. Basel III Standardized Approach, and therefore, are the binding ratios for the
Company as a result of the capital floor. At December 31, 2014, the capital ratios calculated under the U.S. Basel
III Advanced Approach were lower than those calculated under the Standardized Approach, represented as U.S.
Basel I as supplemented by Basel 2.5. The table below presents the Companys RWAs and regulatory capital
ratios under the U.S. Basel III Advanced Approach transitional rules at March 31, 2015 and December 31, 2014.
At
At
March 31, 2015 December 31, 2014
(dollars in millions)
RWAs:
Credit risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operational risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$184,661
110,772
143,531
$184,645
121,363
150,000
Total RWAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$438,964
$456,008
Capital ratios:
Common Equity Tier 1 ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted average assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.1%
14.7%
17.5%
7.8%
$827,054
12.6%
14.1%
16.4%
7.9%
$810,524
131
(1) In accordance with U.S. Basel III, adjusted average assets represent the denominator of the Tier 1 leverage ratio and were composed of
the Companys average daily balance of consolidated on-balance sheet assets under U.S. GAAP during the calendar quarter, adjusted for
disallowed goodwill, transitional intangible assets, certain deferred tax assets, certain financial equity investments and other adjustments.
The following table represents a roll-forward of the Companys Common Equity Tier 1 capital, Additional Tier 1
capital and Tier 2 capital calculated under the U.S. Basel III Advanced Approach transitional rules from
December 31, 2014 to March 31, 2015 (dollars in millions).
Common Equity Tier 1 capital:
Common Equity Tier 1 capital at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $57,324
Change related to the following items:
Value of shareholders common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,762
Net goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(66)
Net intangible assets (other than goodwill and mortgage servicing assets) . . . . . . . . . . . . . . . . . . . . .
(592)
Credit spread premium over risk-free rate for derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(135)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(728)
After-tax debt valuation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125
Adjustments related to accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . .
(219)
Expected credit loss that exceeds eligible credit reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
Other deductions and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(139)
Common Equity Tier 1 capital at March 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $57,342
Additional Tier 1 capital:
Additional Tier 1 capital at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,858
New issuance of qualifying preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,500
Change related to the following items:
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,238)
Nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(160)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
356
Credit spread premium over risk-free rate for derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
200
After-tax debt valuation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(205)
Expected credit loss that exceeds eligible credit reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39
Other adjustments and deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
Additional Tier 1 capital at March 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,404
Tier 1 capital (Common Equity Tier 1 capital plus Additional Tier 1 capital) at March 31, 2015 . . . . . . . $64,746
Tier 2 capital:
Tier 2 capital at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,790
Change related to the following items:
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
204
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,154
Nonredeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
Other adjustments and deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
Tier 2 capital at March 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,178
Total capital at March 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $76,924
132
The following table summarizes the Companys Common Equity Tier 1 capital, Additional Tier 1 capital and
Tier 2 capital calculated under the U.S. Basel III Advanced Approach transitional rules at March 31, 2015 and
December 31, 2014:
At
At
March 31, 2015 December 31, 2014
(dollars in millions)
$21,168
46,740
(1,266)
$21,503
44,625
(1,248)
(6,678)
(6,612)
(1,224)
(632)
(296)
(1,308)
283
243
(320)
(161)
(580)
158
462
(10)
(181)
$57,342
$57,324
$ 7,520
1,196
844
$ 6,020
2,434
1,004
(1,962)
(2,318)
(444)
425
(175)
(644)
630
(39)
(229)
$ 7,404
$ 6,858
$64,746
$64,182
Tier 2 capital:
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other qualifying amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory adjustments and deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,543
3,588
39
8
$ 8,339
2,434
27
(10)
$12,178
$10,790
Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$76,924
$74,972
133
The following table represents a roll-forward of the Companys RWAs calculated under the U.S. Basel III
Advanced Approach transitional rules from December 31, 2014 to March 31, 2015. The RWAs for each category
in the table reflect both on- and off-balance sheet exposures, where appropriate (dollars in millions).
Credit risk RWAs:
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $184,645
Change related to the following items:
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(965)
Securities financing transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,216
Other counterparty credit risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(64)
Securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(576)
Credit valuation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,327
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
972
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(319)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(278)
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
103
Other credit risk(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,400)
Total change in credit risk RWAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
$184,661
$ (10,591)
$110,772
134
$143,531
Pro Forma Regulatory Capital Ratios. The following table presents the Companys pro forma estimates under
the fully phased-in U.S. Basel III Advanced Approach and the fully phased-in U.S. Basel III Standardized
Approach at March 31, 2015:
At March 31, 2015
Fully Phased-In Basis Pro Forma Estimates
U.S. Basel III
U.S. Basel III
Advanced Approach Standardized Approach
(dollars in millions)
$ 51,833
448,003
11.6%
$ 51,833
444,821
11.7%
These fully phased-in basis pro forma estimates are based on the Companys current understanding of U.S. Basel
III and other factors, which may be subject to change as the Company receives additional clarification and
implementation guidance from the Federal Reserve relating to U.S. Basel III and as the interpretation of the
regulation evolves over time. The fully phased-in basis pro forma Common Equity Tier 1 capital, RWAs and
Common Equity Tier 1 risked-based capital ratio estimates are non-GAAP financial measures that the Company
considers to be useful measures for evaluating compliance with new regulatory capital requirements that were
not yet effective at March 31, 2015. These preliminary estimates are subject to risks and uncertainties that may
cause actual results to differ materially and should not be taken as a projection of what the Companys capital
ratios, RWAs, earnings or other results will actually be at future dates. See Risk Factors in Part 1, Item 1A of
the 2014 Form 10-K for a discussion of risks and uncertainties that may affect the future results of the Company.
As of January 1, 2015, the Company is subject to the following minimum capital ratios under U.S. Basel III:
Common Equity Tier 1 capital ratio of 4.5%; Tier 1 capital ratio of 6.0%; Total capital ratio of 8.0%; and Tier 1
leverage ratio of 4.0%. As of January 1, 2018, the Company will be subject to a supplementary leverage ratio
requirement of 5.0%, which includes a Tier 1 supplementary leverage capital buffer of greater than 2.0% in
addition to the 3.0% minimum supplementary leverage ratio (see Supplementary Leverage Ratio herein). In
addition, on a fully phased-in basis by 2019, the Company will be subject to a greater than 2.5% Common Equity
Tier 1 capital conservation buffer and, if deployed by banking regulators, up to a 2.5% Common Equity Tier 1
countercyclical buffer. The capital conservation buffer and countercyclical capital buffer, if any, apply over each
of the Companys Common Equity Tier 1, Tier 1 and Total risk-based capital ratios. Failure to maintain such
buffers will result in restrictions on the Companys ability to make capital distributions, including the payment of
dividends and the repurchase of stock, and to pay discretionary bonuses to executive officers. In addition, in
December 2014, the Federal Reserve issued a proposed rule that would impose a risk-based capital surcharge on
U.S. bank holding companies that are identified as G-SIBs. For further information on the G-SIB surcharge, see
BusinessSupervision and RegulationCapital and Liquidity Standards in Part I, Item 1 of the 2014
Form 10-K.
Capital Plans and Stress Tests.
Pursuant to the Dodd-Frank Act, the Federal Reserve has adopted capital planning and stress test requirements
for large bank holding companies, including the Company, which form part of the Federal Reserves annual
Comprehensive Capital Analysis and Review (CCAR) framework. Under the Federal Reserves capital plan
rule, the Company must submit an annual capital plan to the Federal Reserve, taking into account the results of
separate stress tests designed by the Company and the Federal Reserve, so that the Federal Reserve may assess
the Companys systems and processes that incorporate forward-looking projections of revenues and losses to
monitor and maintain its internal capital adequacy. The capital plan rule requires that such companies receive no
objection from the Federal Reserve before making a capital distribution. In addition, even with an approved
capital plan, a large bank holding company must seek the approval of the Federal Reserve before making a
capital distribution if, among other reasons, it would not meet its regulatory capital requirements after making the
135
proposed capital distribution. In addition, the Federal Reserves final rule on stress testing under the Dodd-Frank
Act requires the Company to conduct semi-annual company-run stress tests. The rule also subjects the Company
to an annual supervisory stress test conducted by the Federal Reserve.
The Company submitted its 2015 annual capital plan to the Federal Reserve in January 2015 and received no
objection to the plan (see Capital Management herein). In March 2015, the Federal Reserve published
summary results of the Dodd-Frank Act and CCAR supervisory stress tests of each large bank holding company,
including the Company. As required, the Company disclosed a summary of the results of its company-run stress
tests on March 11, 2015.
The final rule also requires Advanced Approach banking organizations that have exited from the parallel run,
including the Company, to incorporate the Advanced Approach into their capital planning and company-run
stress tests beginning with the January 1, 2016 cycle. In October 2014, the Federal Reserve revised its capital
planning and stress testing regulations to, among other things, generally limit a large bank holding companys
ability to make capital distributions (other than scheduled payments on Additional Tier 1 and Tier 2 capital
instruments) if the bank holding companys net capital issuances are less than the amount indicated in its capital
plan, and to shift the start and submission dates of the capital plan and stress test cycles beginning with the 2016
cycle.
The Dodd-Frank Act also requires each of the Companys U.S. Subsidiary Banks to conduct an annual stress test.
MSBNA submitted its 2015 annual company-run stress tests to the OCC in January 2015 and MSPBNA submitted
its annual company-run stress tests to the OCC in March 2015. MSBNA published a summary of its stress test
results on March 11, 2015, and MSPBNA will publish the summary of its stress test results between June 15, 2015
and June 30, 2015. In June 2014, the OCC issued a proposed rule, among other things, to shift the timing of the
annual stress testing cycle that applies to the Companys U.S. Subsidiary Banks beginning with the 2016 cycle.
Supplementary Leverage Ratio.
U.S. Basel III requires the Company and its U.S. Subsidiary Banks to disclose information related to its
supplementary leverage ratio beginning on January 1, 2015. The supplementary leverage ratio will become
effective as a capital standard on January 1, 2018. Specifically, beginning on January 1, 2018, the Company must
maintain a Tier 1 supplementary leverage capital buffer of greater than 2% in addition to the 3% minimum
supplementary leverage ratio (for a total of greater than 5%), in order to avoid limitations on capital distributions,
including dividends and stock repurchases, and discretionary bonus payments to executive officers. In addition,
beginning in 2018, the Companys U.S. Subsidiary Banks must maintain a supplementary leverage ratio of 6% to
be considered well-capitalized.
The following table presents the Companys total consolidated assets and consolidated daily average assets under
U.S. GAAP, its total supplementary leverage exposure and its supplementary leverage ratio disclosures on a
transitional basis under the U.S. Basel III rules:
At March 31, 2015
(dollars in millions)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated daily average assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment for derivative exposures(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment for repo-style transactions(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment for off-balance sheet exposures(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other adjustments(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 829,099
$ 838,727
267,050
20,071
63,354
(11,673)
$1,177,529
5.5%
(1) Amount is computed as the average daily balance of consolidated assets under U.S. GAAP during the calendar quarter.
(2) Amount is computed as the arithmetic mean of the month-end balances over the calendar quarter.
(3) Amount reflects adjustments to Tier 1 capital, including disallowed goodwill, transitional intangible assets, certain deferred tax assets,
certain financial equity investments and other adjustments.
(4) Supplementary leverage ratios calculated using Tier 1 capital and supplementary leverage exposures computed under U.S. Basel III on a
transitional basis for the Companys U.S. Subsidiary Banks were as follows: MSBNA: 7.2%; and MSPBNA: 9.7%.
The supplementary leverage exposure (noted in the above table) represents the Companys consolidated daily
average assets under U.S. GAAP as adjusted, among other items, by: (i) the addition of the potential future
exposure for derivative contracts (including derivatives that are centrally cleared for clients), the gross-up of cash
collateral netting where certain qualifying criteria are not met, and the effective notional principal amount of sold
credit protection offset by certain qualifying purchased credit protection; (ii) the counterparty credit risk
associated with repo-style transactions; (iii) the credit equivalent amount of off-balance sheet exposures, which is
computed by applying the relevant credit conversion factors; and (iv) certain amounts deducted or adjusted from
Tier 1 capital under U.S. Basel III. The supplementary leverage exposure and supplementary leverage ratio are
non-GAAP financial measures that the Company considers to be useful measures for evaluating compliance with
new regulatory capital requirements that have not yet become effective.
The Company estimates its pro forma fully phased-in supplementary leverage ratio to be approximately 5.1% at
March 31, 2015. This estimate utilizes a fully phased-in U.S. Basel III Tier 1 capital numerator and a
denominator of approximately $1.17 trillion. The Companys estimates are subject to risks and uncertainties that
may cause actual results to differ materially from estimates based on these regulations. Further, these
expectations should not be taken as projections of what the Companys supplementary leverage ratios or
earnings, assets or exposures will actually be at future dates. See Risk Factors in Part I, Item 1A of the 2014
Form 10-K for a discussion of risks and uncertainties that may affect the future results of the Company.
Required Capital.
The Companys required capital (Required Capital) estimation is based on the Required Capital framework, an
internal capital adequacy measure. This framework is a risk-based and leverage use-of-capital measure, which is
compared with the Companys regulatory capital to ensure that the Company maintains an amount of going
concern capital after absorbing potential losses from extreme stress events, where applicable, at a point in time.
The Company defines the difference between its regulatory capital and aggregate Required Capital as Parent
capital. Average Common Equity Tier 1 capital, aggregate Required Capital and Parent capital for the quarter
ended March 31, 2015 were approximately $56.7 billion, $40.3 billion and $16.4 billion, respectively. The
Company generally holds Parent capital for prospective regulatory requirements, including U.S. Basel III
transitional deductions and adjustments expected to reduce the Companys capital through 2018. The Company
also holds Parent capital for organic growth, acquisitions and other capital needs.
Common Equity Tier 1 capital and common equity attribution to the business segments is based on capital usage
calculated by the Required Capital framework as well as each business segments relative contribution to the
Companys total Required Capital. Required Capital is assessed at each business segment and further attributed
to product lines. This process is intended to align capital with the risks in each business segment in order to allow
senior management to evaluate returns on a risk-adjusted basis. The Required Capital framework will evolve
over time in response to changes in the business and regulatory environment and to incorporate enhancements in
modeling techniques. The Company will continue to evaluate the framework with respect to the impact of future
regulatory requirements, as appropriate.
137
The following table presents the Companys business segments and the Parents average Common Equity Tier 1
capital and average common equity, which were calculated on a monthly basis:
Three Months Ended
March 31,
2015
2014
Average Common
Average
Average Common
Average
Equity Tier 1 Capital Common Equity Equity Tier 1 Capital Common Equity
(dollars in billions)
Institutional Securities . . . . . . . . . . . . .
Wealth Management . . . . . . . . . . . . . .
Investment Management . . . . . . . . . . .
Parent capital . . . . . . . . . . . . . . . . . . . .
$35.1
3.9
1.3
16.4
$37.0
10.3
2.3
16.0
$29.9
5.3
1.6
18.6
$30.8
11.3
2.6
18.6
Total . . . . . . . . . . . . . . . . . . . . . . .
$56.7
$65.6
$55.4
$63.3
Item 3.
Market Risk.
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, implied
volatilities (the price volatility of the underlying instrument imputed from option prices), correlations or other
market factors, such as market liquidity, will result in losses for a position or portfolio. Generally, the Company
incurs market risk as a result of trading, investing and client facilitation activities, principally within the
Companys Institutional Securities business segment where the substantial majority of the Companys Value-atRisk (VaR) for market risk exposures is generated. In addition, the Company incurs trading-related market risk
within its Wealth Management business segment. The Companys Investment Management business segment
incurs principally Non-trading market risk primarily from capital investments in real estate funds and
investments in private equity vehicles. For a further discussion of the Companys Market Risk, see Quantitative
and Qualitative Disclosures about Market RiskRisk Management in Part II, Item 7A of the 2014 Form 10-K.
VaR.
The Company uses the statistical technique known as VaR as one of the tools used to measure, monitor and
review the market risk exposures of its trading portfolios. The Companys Market Risk Department calculates
and distributes daily VaR-based risk measures to various levels of management.
VaR Methodology, Assumptions and Limitations.
The Company estimates VaR using a model based on volatility-adjusted historical simulation for general market
risk factors and Monte Carlo simulation for name-specific risk in corporate shares, bonds, loans and related
derivatives. The model constructs a distribution of hypothetical daily changes in the value of trading portfolios
based on the following: historical observation of daily changes in key market indices or other market risk factors;
and information on the sensitivity of the portfolio values to these market risk factor changes. The Companys
VaR model uses four years of historical data with a volatility adjustment to reflect current market conditions. The
Companys VaR for risk management purposes (Management VaR) is computed at a 95% level of confidence
over a one-day time horizon, which is a useful indicator of possible trading losses resulting from adverse daily
market moves. The Companys 95%/one-day VaR corresponds to the unrealized loss in portfolio value that,
based on historically observed market risk factor movements, would have been exceeded with a frequency of 5%,
or five times in every 100 trading days, if the portfolio were held constant for one day.
The Companys VaR model generally takes into account linear and non-linear exposures to equity and
commodity price risk, interest rate risk, credit spread risk and foreign exchange rates. The model also takes into
account linear exposures to implied volatility risks for all asset classes and non-linear exposures to implied
volatility risks for equity, commodity and foreign exchange referenced products. The VaR model also captures
certain implied correlation risks associated with portfolio credit derivatives as well as certain basis risks (e.g.,
corporate debt and related credit derivatives).
The Company uses VaR as one of a range of risk management tools. Among their benefits, VaR models permit
estimation of a portfolios aggregate market risk exposure, incorporating a range of varied market risks and
portfolio assets. One key element of the VaR model is that it reflects risk reduction due to portfolio
diversification or hedging activities. However, VaR has various limitations, which include, but are not limited to:
use of historical changes in market risk factors, which may not be accurate predictors of future market conditions
and may not fully incorporate the risk of extreme market events that are outsized relative to observed historical
market behavior or reflect the historical distribution of results beyond the 95% confidence interval; and reporting
of losses in a single day, which does not reflect the risk of positions that cannot be liquidated or hedged in one
day. A small proportion of market risk generated by trading positions is not included in VaR. The modeling of
the risk characteristics of some positions relies on approximations that, under certain circumstances, could
produce significantly different results from those produced using more precise measures. VaR is most
139
appropriate as a risk measure for trading positions in liquid financial markets and will understate the risk
associated with severe events, such as periods of extreme illiquidity. The Company is aware of these and other
limitations and, therefore, uses VaR as only one component in its risk management oversight process. This
process also incorporates stress testing and scenario analyses and extensive risk monitoring, analysis and control
at the trading desk, division and Company levels.
The Companys VaR model evolves over time in response to changes in the composition of trading portfolios
and to improvements in modeling techniques and systems capabilities. The Company is committed to continuous
review and enhancement of VaR methodologies and assumptions in order to capture evolving risks associated
with changes in market structure and dynamics. As part of the Companys regular process improvements,
additional systematic and name-specific risk factors may be added to improve the VaR models ability to more
accurately estimate risks to specific asset classes or industry sectors.
Since the reported VaR statistics are estimates based on historical data, VaR should not be viewed as predictive
of the Companys future revenues or financial performance or of its ability to monitor and manage risk. There
can be no assurance that the Companys actual losses on a particular day will not exceed the VaR amounts
indicated below or that such losses will not occur more than five times in 100 trading days for a 95%/one-day
VaR. VaR does not predict the magnitude of losses which, should they occur, may be significantly greater than
the VaR amount.
VaR statistics are not readily comparable across firms because of differences in the firms portfolios, modeling
assumptions and methodologies. These differences can result in materially different VaR estimates across firms
for similar portfolios. The impact of such differences varies depending on the factor history assumptions, the
frequency with which the factor history is updated and the confidence level. As a result, VaR statistics are more
useful when interpreted as indicators of trends in a firms risk profile rather than as an absolute measure of risk to
be compared across firms.
The Company utilizes the same VaR model for risk management purposes as well as for regulatory capital
calculations. The Companys VaR model has been approved by the Companys regulators for use in regulatory
capital calculations.
The portfolio of positions used for the Companys Management VaR differs from that used for regulatory capital
requirements (Regulatory VaR), as Management VaR contains certain positions that are excluded from
Regulatory VaR. Examples include counterparty Credit Valuation Adjustments (CVA) and related hedges, as
well as loans that are carried at fair value and associated hedges. Additionally, the Companys Management VaR
excludes certain risks contained in its Regulatory VaR, such as hedges to counterparty exposures related to the
Companys own credit spread.
Table 1 below presents the Management VaR for the Companys Trading portfolio, on a period-end, quarterly
average and quarterly high and low basis. The Credit Portfolio is disclosed as a separate category from the
Primary Risk Categories, and includes counterparty CVA and related hedges, as well as loans that are carried at
fair value and associated hedges.
140
Trading Risks.
The table below presents the Companys 95%/one-day Management VaR:
Table 1: 95% Management VaR
Market Risk Category
$ 31
24
12
21
(41)
$ 32
18
11
17
(34)
$ 40 $ 29
40
14
16
7
21
15
N/A N/A
$ 31
18
10
15
(30)
$ 34
18
11
14
(34)
$44
21
16
16
N/A
$30
16
7
12
N/A
$ 47
$ 44
$ 57
$ 38
$ 44
$ 43
$49
$40
20
N/A
13
N/A
15
N/A
10
N/A
$ 59
$ 42
$54
$43
Credit Portfolio . . . . . . . . . . . . . . . . . . . . . . . .
Less: Diversification benefit(1)(2) . . . . . . . . .
Total Management VaR . . . . . . . . . . . . . . . . .
13
(10)
$ 50
16
(13)
$ 47
15
(14)
$ 45
12
(8)
$ 47
N/ANot Applicable
(1) Diversification benefit equals the difference between the total Management VaR and the sum of the component VaRs. This benefit arises
because the simulated one-day losses for each of the components occur on different days; similar diversification benefits also are taken
into account within each component.
(2) The high and low VaR values for the total Management VaR and each of the component VaRs might have occurred on different days
during the quarter, and therefore, the diversification benefit is not an applicable measure.
Distribution of VaR Statistics and Net Revenues for the quarter ended March 31, 2015.
One method of evaluating the reasonableness of the Companys VaR model as a measure of the Companys
potential volatility of net revenues is to compare VaR with actual trading revenues. Assuming no intraday
trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the
year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the adequacy of the
VaR model would be questioned. The Company evaluates the reasonableness of its VaR model by comparing the
potential declines in portfolio values generated by the model with actual trading results for the Company, as well
as individual business units. For days where losses exceed the VaR statistic, the Company examines the drivers
of trading losses to evaluate the VaR models accuracy relative to realized trading results.
The distribution of VaR Statistics and Net Revenues is presented in the histograms below for both the Primary
Risk Categories and the Total Trading populations.
141
Number of Days
21
20
14
142
54 to 57
>57
48 to 51
45 to 48
42 to 45
39 to 42
36 to 39
<36
51 to 54
The histogram below shows the distribution for the quarter ended March 31, 2015 of daily net trading revenues,
including profits and losses from positions included in VaR for the Companys businesses that comprise the
Primary Risk Categories. Daily net trading revenues also include intraday trading activities but exclude certain
items not captured in the VaR model, such as fees, commissions and net interest income. Daily net trading
revenues differ from the definition of revenues required for Regulatory VaR backtesting, which further excludes
intraday trading. During the quarter ended March 31, 2015, the Companys businesses that comprise the Primary
Risk Categories experienced net trading losses on 2 days, of which no day was in excess of the 95%/one-day
Primary Risk Categories VaR.
Number of Days
22
15
11
143
2
125 to 150
0
>150
2
100 to 125
(Loss)
75 to 100
50 to 75
25 to 50
0 to 25
2
-25 to 0
<-25
Gain
Total TradingIncluding the Primary Risk Categories and the Credit Portfolio.
As shown in Table 1, the Companys average 95%/one-day Total Management VaR, which includes the Primary
Risk Categories and the Credit Portfolio, for the quarter ended March 31, 2015 was $47 million. The histogram
below presents the distribution of the Companys daily 95%/one-day Total Management VaR for the quarter
ended March 31, 2015, which was in a range between $43 million and $52 million for approximately 95% of
trading days during the quarter.
21
144
55 to 58
58 to 61
>61
49 to 52
46 to 49
43 to 46
2
40 to 43
52 to 55
12
<40
Number of Days
28
The histogram below shows the distribution for the quarter ended March 31, 2015 of daily net trading revenues,
including profits and losses from Primary Risk Categories, Credit Portfolio positions and intraday trading
activities, for the Companys Trading businesses. Daily net trading revenues also include intraday trading
activities but exclude certain items not captured in the VaR model, such as fees, commissions and net interest
income. Daily net trading revenues differ from the definition of revenues required for Regulatory VaR
backtesting, which further excludes intraday trading. During the quarter ended March 31, 2015, the Company
experienced net trading losses on 3 days, of which no day was in excess of the 95%/one-day Total Management
VaR.
18
11
10
2
125 to 150
(Loss)
100 to 125
75 to 100
50 to 75
25 to 50
0 to 25
0
-25 to 0
<-25
>150
Number of Days
16
Gain
Non-trading Risks.
The Company believes that sensitivity analysis is an appropriate representation of the Companys non-trading
risks. Reflected below is this analysis covering substantially all of the non-trading risk in the Companys
portfolio.
Counterparty Exposure Related to the Companys Own Credit Spread.
The credit spread risk relating to the Companys own mark-to-market derivative counterparty exposure is
managed separately from VaR. The credit spread risk sensitivity of this exposure corresponds to an increase in
value of approximately $7 million and $6 million for each 1 basis point widening in the Companys credit spread
level at March 31, 2015 and December 31, 2014, respectively.
Funding Liabilities.
The credit spread risk sensitivity of the Companys mark-to-market funding liabilities corresponded to an
increase in value of approximately $10 million for each 1 basis point widening in the Companys credit spread
level at both March 31, 2015 and December 31, 2014.
145
$ 35
256
$ 94
204
$(408)
(393)
Investments.
The Company makes investments in both public and private companies. These investments are predominantly
equity positions with long investment horizons, the majority of which are for business facilitation purposes. The
market risk related to these investments is measured by estimating the potential reduction in net income
associated with a 10% decline in investment values.
10% Sensitivity
At
At
March 31, 2015 December 31, 2014
(dollars in millions)
Investments
$106
134
146
$109
136
150
148
189
142
195
Lending Activities.
The Company provides loans to a variety of customers, from large corporate and institutional clients to high net
worth individuals. In addition, the Company purchases loans in the secondary market. Loans held for investment
and loans held for sale are classified in Loans, and loans held at fair value are classified in Trading assets in the
Companys condensed consolidated statements of financial condition. See Notes 3 and 7 to the Companys
condensed consolidated financial statements in Item 1 for further information.
The following tables present the Companys loan portfolio by loan type within its Institutional Securities and
Wealth Management business segments at March 31, 2015 and December 31, 2014.
Institutional
Securities
Corporate
Lending(1)
Total
Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,748
$ 7,613
5,243
$ 5,627
17,370
16,845
$20,988
17,370
16,845
5,243
7,748
12,856
39,842
60,446
Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,607
753
40
743
114
7,360
154
743
6,607
1,536
114
8,257
Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
489
5,200
2,044
3,661
5,689
2,044
3,661
489
10,905
11,394
Total loans(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,844
$25,297
$39,956
$80,097
(1) In addition to loans, at March 31, 2015, $68.0 billion of unfunded lending commitments were accounted for as held for investment, $18.8
billion of unfunded lending commitments were accounted for as held for sale and $2.3 billion of unfunded lending commitments were
accounted for at fair value.
(2) In addition to loans, at March 31, 2015, $1.7 billion of unfunded lending commitments were accounted for as held for investment, $0.1
billion of unfunded lending commitments were accounted for as held for sale and $2.2 billion of unfunded lending commitments were
accounted for at fair value.
(3) In addition to loans, at March 31, 2015, $5.1 billion of unfunded lending commitments were accounted for as held for investment.
(4) Amounts exclude customer margin loans outstanding of $30.5 billion and employee loans outstanding of $4.9 billion at March 31, 2015.
See Notes 5 and 7 to the Companys condensed consolidated financial statements in Item 1 for further information.
147
Institutional
Securities
Corporate
Lending(1)
Total
Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,957
$ 6,161
5,277
$ 5,423
16,574
15,727
$19,541
16,574
15,727
5,277
7,957
11,438
37,724
57,119
Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,801
399
16
1,144
98
8,200
114
1,144
7,801
1,559
98
9,458
Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
483
6,610
1,682
3,187
7,093
1,682
3,187
483
11,479
11,962
Total loans(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,241
$24,476
$37,822
$78,539
(1) In addition to loans, at December 31, 2014, $62.9 billion of unfunded lending commitments were accounted for as held for investment,
$15.8 billion of unfunded lending commitments were accounted for as held for sale and $3.3 billion of unfunded lending commitments
were accounted for at fair value.
(2) In addition to loans, at December 31, 2014, $2.3 billion of unfunded lending commitments were accounted for as held for investment,
$0.8 billion of unfunded lending commitments were accounted for as held for sale and $2.1 billion of unfunded lending commitments
were accounted for at fair value.
(3) In addition to loans, at December 31, 2014, $5.0 billion of unfunded lending commitments were accounted for as held for investment.
(4) Amounts exclude customer margin loans outstanding of $29.0 billion and employee loans outstanding of $5.1 billion at December 31,
2014. See Notes 5 and 7 to the Companys condensed consolidated financial statements in Item 1 for further information.
At March 31, 2015 and December 31, 2014, the allowance for loan losses related to funded loans that were
accounted for as held for investment was $165 million and $149 million, respectively, and the allowance for loan
losses related to unfunded lending commitments that were accounted for as held for investment was $185 million
and $149 million, respectively. The aggregate allowance for loan losses for funded and unfunded loans increased
over the quarter due primarily to the growth in the portfolios and reflects the high quality of the Companys
lending portfolios resulting from strong credit risk management. See Note 7 to the Companys condensed
consolidated financial statements in Item 1 for further information.
Institutional Securities Corporate Lending Activities. In connection with certain of its Institutional Securities
business segment activities, the Company provides loans or lending commitments to select corporate clients.
These loans and lending commitments may have varying terms; may be senior or subordinated; may be secured
or unsecured; are generally contingent upon representations, warranties and contractual conditions applicable to
the borrower; and may be syndicated, traded or hedged by the Company.
The Companys corporate lending credit exposure is primarily from loans and lending commitments used for
general corporate purposes, working capital and liquidity purposes and typically consists of revolving lines of
credit, letter of credit facilities and term loans. In addition, the Company provides event-driven loans and
lending commitments associated with a particular event or transaction, such as to support client merger,
acquisition or recapitalization activities. The Companys event-driven loans and lending commitments
typically consist of revolving lines of credit, term loans and bridge loans.
148
Corporate lending commitments may not be indicative of the Companys actual funding requirements, as the
commitment may expire unused or the borrower may not fully utilize the commitment or the Companys portion
of the commitment may be reduced through the syndication or sales process. Such syndications or sales may
involve third-party institutional investors where the Company may have a custodial relationship, such as prime
brokerage clients.
The Company may hedge and/or sell its exposures in connection with loans and lending commitments.
Additionally, the Company may mitigate credit risk by requiring borrowers to pledge collateral and include
financial covenants in lending commitments to such borrowers. In the Companys condensed consolidated
statements of financial condition these loans are carried at either fair value with changes in fair value recorded in
earnings; held for investment, which are recorded at amortized cost; or held for sale, which are recorded at lower
of cost or fair value.
The Companys credit exposure from its corporate lending positions and lending commitments is measured in
accordance with the Companys internal risk management standards. Lending commitments represent legally
binding obligations to provide funding to clients for all lending transactions. Since commitments associated with
these business activities may expire unused or may not be utilized to full capacity, they do not necessarily reflect
the actual future cash funding requirements.
The following tables present the Companys Institutional Securities Corporate Lending Commitments and
Funded Loans at March 31, 2015 and December 31, 2014.
Credit Rating(1)
Less than 1
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A..............................................
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
262
3,851
6,033
4,599
24
2,747
4,248
8,499
74
4,752
12,042
21,761
227
1,605
Total(2)(3)
360
11,350
22,550
36,464
Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,745
1,762
15,518
8,335
38,629
17,535
1,832
5,302
70,724
32,934
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,507
$23,853
$56,164
$7,134
$103,658
Credit Rating(1)
Less than 1
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A..............................................
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
275
3,760
2,135
3,350
74
2,764
4,534
9,303
37
4,580
12,029
22,424
173
1,503
Total(2)(3)
386
11,104
18,871
36,580
Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,520
2,034
16,675
7,222
39,070
17,755
1,676
4,050
66,941
31,061
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,554
$23,897
$56,825
$5,726
$ 98,002
(1) Obligor credit ratings are determined by the Companys Credit Risk Management Department.
(2) For syndications led by the Company, lending commitments accepted by the borrower but not yet closed are net of the amounts agreed to
by counterparties that will participate in the syndication. For syndications that the Company participates in and does not lead, lending
commitments accepted by the borrower but not yet closed include only the amount that the Company expects it will be allocated from the
lead syndicate bank.
(3) Amounts include the fair value adjustment of ($0.3) billion related to the Companys unfunded lending commitments at both March 31,
2015 and December 31. 2014.
149
At March 31, 2015 and December 31, 2014, the aggregate amount of investment grade funded loans was $6.3
billion (at both dates) and, the aggregate amount of non-investment grade funded loans was $8.5 billion and $9.9
billion, respectively. In connection with these corporate lending activities (which include both corporate funded
and unfunded lending commitments), the Company had hedges (which included single name, sector and
index hedges) with a notional amount of $9.2 billion related to the total corporate lending exposure of $103.7
billion at March 31, 2015 and with a notional amount of $12.9 billion related to the total corporate lending
exposure of $98.0 billion at December 31, 2014. At March 31, 2015 and December 31, 2014, there were no
significant loans and lending commitments held for investment under non-accrual status within Corporate
Lending, as no significant loans or lending commitments were past due or had payments that were in doubt.
Event-Driven Loans and Lending Commitments at March 31, 2015.
Included in the total corporate lending exposure amounts in the table above at March 31, 2015 were eventdriven exposures of $21.8 billion composed of funded loans of $4.0 billion and lending commitments of $17.8
billion. Included in the event-driven exposure at March 31, 2015 were $13.2 billion of loans and lending
commitments to non-investment grade borrowers. The maturity profile of these event-driven loans and lending
commitments at March 31, 2015 were as follows: 38% will mature in less than 1 year, 13% will mature within 1
to 3 years, 23% will mature within 3 to 5 years and 26% will mature in over 5 years.
Industry ExposureCorporate Lending. The Company also monitors its credit exposure to individual
industries for credit exposure arising from corporate loans and lending commitments as discussed below.
The following table presents the Companys Institutional Securities credit exposure from its primary Corporate
Lending Commitments and Funded Loans by industry:
Industry
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer discretionary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds, exchanges and other financial services(1) . . . . . . . . . . . . . . . . . . . .
Consumer staples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecommunications services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,521
13,464
10,894
10,541
10,508
9,848
8,394
7,274
4,787
4,449
4,274
4,704
$14,056
9,707
11,717
7,572
9,134
10,214
9,277
7,320
5,259
4,335
4,616
4,795
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$103,658
$98,002
(1) Includes mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses and diversified financial
services.
Institutional Securities Other Lending Activities. In addition to the primary corporate lending activities
described above, the Companys Institutional Securities business segment engages in other lending
activities. These activities include commercial and residential mortgage lending, asset-backed lending, corporate
loans purchased in the secondary market, financing extended to institutional equities clients and loans to
municipalities. At March 31, 2015 and December 31, 2014, approximately 99.9% of Institutional Securities other
lending activities held for investment were current and approximately 0.1% were on non-accrual status because
the loans were past due for a period of 90 days or more or payment of principal or interest was in doubt.
150
The following tables present the Companys Institutional Securities business segments other lending activities
by remaining contract maturity:
Less than 1
Total
Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,456
492
2,046
2,084
4,099
2,153
2,903
9,647
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,948
$11,167
Less than 1
$4,129
$7,053
$25,297
Total
Corporate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,231
100
1,655
1,698
5,060
2,112
2,336
9,608
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,331
$ 9,929
$3,996
$6,220
$24,476
In addition, Institutional Securities other lending activities include margin lending, which allows the client to
borrow against the value of qualifying securities. At March 31, 2015 and December 31, 2014, Institutional
Securities margin lending of $16.6 billion and $15.3 billion, respectively, were classified within Customer and
other receivables in the Companys condensed consolidated statements of financial condition.
Wealth Management Lending Activities. The principal Wealth Management lending activities include
securities-based lending and residential real estate loans. The following tables present the Companys Wealth
Management business segment lending activities by remaining contract maturity:
At March 31, 2015
Years to Maturity
Less than 1
1-3
3-5
Over 5
(dollars in millions)
Total
$20,542
$ 961
$776
$ 718
16,959
$22,997
16,959
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,542
$ 961
$776
$17,677
$39,956
Total
$19,408
$1,071
$750
$ 768
15,825
$21,997
15,825
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,408
$1,071
$750
$16,593
$37,822
Securities-based lending provided to the Companys retail clients is primarily conducted through the Companys
PLA platform which had an outstanding funded loan balance of $20.1 billion and $19.1 billion at March 31, 2015
and December 31, 2014, respectively. These loans allow the client to borrow money against the value of
qualifying securities for any purpose other than purchasing securities. The Company establishes approved credit
151
lines against qualifying securities and monitors limits daily and, pursuant to such guidelines, requires customers
to deposit additional collateral, or reduce debt positions, when necessary. These credit lines are primarily
uncommitted loan facilities, as the Company reserves the right to not make any advances, or may terminate these
credit lines at any time. Factors considered in the review of these loans include but are not limited to the loan
amount, the degree of leverage and the quality of diversification, price volatility and liquidity of the collateral.
Residential real estate loans consist of first and second lien mortgages, including HELOC loans. For these loans,
a loan evaluation process is adopted within a framework of credit underwriting policies and collateral
valuation. The Companys underwriting policy is designed to ensure that all borrowers pass an assessment of
capacity and willingness to pay, which includes an analysis of applicable industry standard credit scoring models
(e.g., Fair Isaac Corporation (FICO) scores), debt ratios and assets of the borrower. Loan-to-value ratios are
determined based on independent third-party property appraisal/valuations, and security lien position is
established through title/ownership reports. The vast majority of mortgage and HELOC loans are held for
investment in the Companys Wealth Management business segments loan portfolio.
During the first quarter of 2015, loans and lending commitments associated with the Companys Wealth
Management business segment lending activities increased by approximately 5%, mainly due to growth in PLA
and residential real estate loans. At March 31, 2015 and December 31, 2014, approximately 99.9% of the
Companys Wealth Management business segment lending activities held for investment were current; while
approximately 0.1% were on non-accrual status because the loans were past due for a period of 90 days or more
or payment of principal or interest was in doubt.
The Companys Wealth Management business segment also provides margin lending to retail clients and had an
outstanding balance of $13.9 billion and $13.7 billion at March 31, 2015 and December 31, 2014, respectively,
which were classified within Customer and other receivables within the Companys condensed consolidated
statements of financial condition.
In addition, the Companys Wealth Management business segment has employee loans that are granted primarily
in conjunction with a program established by the Company to recruit and retain certain employees. These loans,
recorded in Customer and other receivables in the Companys condensed consolidated statements of financial
condition, are full recourse, require periodic payments and have repayment terms ranging from 2 to 12 years. The
Company establishes an allowance for loan amounts it does not consider recoverable from terminated employees,
which is recorded in Compensation and benefits expense.
Credit ExposureDerivatives.
The Company incurs credit risk as a dealer in over-the-counter (OTC) derivatives. Credit risk with respect to
derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract.
In connection with its OTC derivative activities, the Company generally enters into master netting agreements
and collateral arrangements with counterparties. These agreements provide the Company with the ability to
demand collateral as well as to liquidate collateral and offset receivables and payables covered under the same
master netting agreement in the event of counterparty default. The Company manages its trading positions by
employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and
hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial
instruments, including a variety of derivative products (e.g., futures, forwards, swaps and options). For credit
exposure information on the Companys OTC derivative products, see Note 10 to the Companys condensed
consolidated financial statements in Item 1.
Credit Derivatives. A credit derivative is a contract between a seller (guarantor) and buyer (beneficiary) of
protection against the risk of a credit event occurring on one or more debt obligations issued by a specified
reference entity. The beneficiary typically pays a periodic premium over the life of the contract and is protected
for the period. If a credit event occurs, the guarantor is required to make payment to the beneficiary based on the
152
terms of the credit derivative contract. Credit events, as defined in the contract, may be one or more of the
following defined events: bankruptcy, dissolution or insolvency of the referenced entity, failure to pay, obligation
acceleration, repudiation, payment moratorium and restructurings.
The Company trades in a variety of credit derivatives and may either purchase or write protection on a single
name or portfolio of referenced entities. In transactions referencing a portfolio of entities or securities, protection
may be limited to a tranche of exposure or a single name within the portfolio. The Company is an active market
maker in the credit derivatives markets. As a market maker, the Company works to earn a bid-offer spread on
client flow business and manages any residual credit or correlation risk on a portfolio basis. Further, the
Company uses credit derivatives to manage its exposure to residential and commercial mortgage loans and
corporate lending exposures during the periods presented. The effectiveness of the Companys credit default
swap (CDS) protection as a hedge of the Companys exposures may vary depending upon a number of factors,
including the contractual terms of the CDS.
The Company actively monitors its counterparty credit risk related to credit derivatives. A majority of the
Companys counterparties are composed of banks, broker-dealers, insurance and other financial institutions.
Contracts with these counterparties may include provisions related to counterparty rating downgrades, which
may result in additional collateral being required by the Company. As with all derivative contracts, the Company
considers counterparty credit risk in the valuation of its positions and recognizes credit valuation adjustments as
appropriate within Trading revenues in the Companys condensed consolidated statements of income.
The following tables summarize the key characteristics of the Companys credit derivative portfolio by
counterparty type at March 31, 2015 and December 31, 2014. The fair values shown are before the application of
contractual netting or collateral. For additional credit exposure information on the Companys credit derivative
portfolio, see Note 10 to the Companys condensed consolidated financial statements in Item 1.
At March 31, 2015
Fair Values(1)
Notionals
Receivable
Payable
Net
Beneficiary Guarantor
(dollars in millions)
$21,297
6,648
107
$21,010
6,944
109
$ 287 $655,204
(296) 212,542
(2)
4,822
$621,015
217,226
3,236
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28,052
$28,063
$ (11) $872,568
$841,477
(1) The Companys CDS are classified in either Level 2 or Level 3 of the fair value hierarchy. Approximately 3% of receivable fair values
and 7% of payable fair values represent Level 3 amounts (see Note 3 to the Companys condensed consolidated financial statements in
Item 1).
At December 31, 2014
Fair Values(1)
Notionals
Receivable
Payable
Net
Beneficiary Guarantor
(dollars in millions)
$25,452
6,639
91
$25,323
6,697
89
$129 $712,466
(58) 216,489
2
5,049
$687,155
217,201
3,706
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$32,182
$32,109
$ 73
$908,062
$934,004
(1) The Companys CDS are classified in either Level 2 or Level 3 of the fair value hierarchy. Approximately 4% of receivable fair values
and 7% of payable fair values represent Level 3 amounts (see Note 3 to the condensed consolidated financial statements in Item 1).
153
Industry ExposureOTC Derivative Products. The Company also monitors its credit exposure to individual
industries for current exposure arising from the Companys OTC derivative contracts.
The following table shows the Companys OTC derivative products at fair value by industry:
At March 31, At December 31,
2015
2014
(dollars in millions)
Industry
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banks and securities firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds, exchanges and other financial services(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regional governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special purpose vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not-for-profit organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sovereign governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer staples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,924
3,513
2,818
2,589
1,765
1,500
1,015
979
776
713
616
3,967
$ 3,797
3,297
2,321
2,278
1,603
1,365
1,089
905
889
761
650
3,272
Total(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,175
$22,227
(1) Amounts include mutual funds, pension funds, private equity and real estate funds, exchanges and clearinghouses and diversified
financial services.
(2) For further information on derivative instruments and hedging activities, see Note 10 to the Companys condensed consolidated financial
statements in Item 1.
Other.
In addition to the activities noted above, there are other credit risks managed by the Companys Credit Risk
Management Department and various business areas within the Companys Institutional Securities business
segment. The Company participates in securitization activities whereby it extends short-term or long-term
funding to clients through loans and lending commitments that are secured by the assets of the borrower and
generally provide for over-collateralization, including commercial real estate loans, loans secured by loan pools,
commercial company loans, and secured lines of revolving credit. Credit risk with respect to these loans and
lending commitments arises from the failure of a borrower to perform according to the terms of the loan
agreement or a decline in the underlying collateral value. See Note 6 to the Companys condensed consolidated
financial statements in Item 1 for information about the Companys securitization activities. In addition, a
collateral management group monitors collateral levels against requirements and oversees the administration of
the collateral function. See Note 5 to the Companys condensed consolidated financial statements in Item 1 for
additional information about the Companys collateralized transactions.
Country Risk Exposure.
Country risk exposure is the risk that uncertainties arising from the economic, social, security and political
conditions within a foreign country (any country other than the U.S.) will adversely affect the ability of the
sovereign government and/or obligors within the country to honor their obligations to the Company. Country risk
exposure is measured in accordance with the Companys internal risk management standards and includes
obligations from sovereign governments, corporations, clearinghouses and financial institutions. The Company
actively manages country risk exposure through a comprehensive risk management framework that combines
credit and market fundamentals and allows the Company to effectively identify, monitor and limit country risk.
Country risk exposure before and after hedges is monitored and managed.
154
The Companys obligor credit evaluation process may also identify indirect exposures whereby an obligor has
vulnerability or exposure to another country or jurisdiction. Examples of indirect exposures include mutual funds
that invest in a single country, offshore companies whose assets reside in another country to that of the offshore
jurisdiction and finance company subsidiaries of corporations. Indirect exposures identified through the credit
evaluation process may result in a reclassification of country risk.
The Company conducts periodic stress testing that seek to measure the impact on the Companys credit and
market exposures of shocks stemming from negative economic or political scenarios. The set of stress test
scenarios includes, where appropriate, contagion effects to vulnerable regions and countries. This analysis, and
results of the stress tests, may result in the amendment of limits or exposure mitigation.
The Companys sovereign exposures consist of financial instruments entered into with sovereign and local
governments. Its non-sovereign exposures consist of exposures to primarily corporations and financial
institutions. The following table shows the Companys ten largest non-U.S. country risk net exposures at
March 31, 2015. Index credit derivatives are included in the Companys country risk exposure tables. Each
reference entity within an index is allocated to that reference entitys country of risk. Index exposures are
allocated to the underlying reference entities in proportion to the notional weighting of each reference entity in
the index, adjusted for any fair value receivable/payable for that reference entity. Where credit risk crosses
multiple jurisdictions, for example, a CDS purchased from an issuer in a specific country that references bonds
issued by an entity in a different country, the fair value of the CDS is reflected in the Net Counterparty Exposure
column based on the country of the CDS issuer. Further, the notional amount of the CDS adjusted for the fair
value of the receivable/payable is reflected in the Net Inventory column based on the country of the underlying
reference entity.
Net
Inventory(1)
Country
Net
Counterparty
Exposure(2)(3)
Funded
Lending
Unfunded
Commitments
Exposure
Before
Hedges
Hedges(4)
Increase/
(Decrease) in Net
Exposure from
Net
December 31,
Exposure(5)
2014
(dollars in millions)
United Kingdom:
Sovereigns . . . . . .
Non-sovereigns . .
$ (238)
1,942
73
13,368
$
1,986
$
7,331
$ 233
1,485
Subtotal . . . .
$1,704
$13,441
$1,986
$7,331
$1,718
France:
Sovereigns . . . . . .
Non-sovereigns . .
$ 719
776
$
34
$
2,289
719 $ $ 719
6,165 (1,023)
5,142
$2,012
62
Subtotal . . . .
$1,495
$ 3,066
34
$2,289
$2,074
Germany:
Sovereigns . . . . . .
Non-sovereigns . .
$ 870
200
269
4,131
$
437
$
3,503
$ (912)
691
Subtotal . . . .
$1,070
$ 4,400
$ 437
$3,503
$ (221)
China:
Sovereigns . . . . . .
Non-sovereigns . .
$ 887
1,586
200
451
$
523
$
313
$ 1,087 $
2,873
(15) $ 1,072
(62)
2,811
$ 459
(112)
Subtotal . . . .
$2,473
651
$ 523
$ 313
$ 3,960 $
(77) $ 3,883
$ 347
$3,263
(72)
320
$
915
$
150
$ 3,263 $ $ 3,263
1,313
(695)
618
42
(27)
$3,191
320
$ 915
$ 150
15
Brazil:
Sovereigns . . . . . .
Non-sovereigns . .
Subtotal . . . .
3,066
155
Net
Inventory(1)
Country
Net
Counterparty
Exposure(2)(3)
Funded
Lending
Unfunded
Commitments
Exposure
Before
Hedges
Hedges(4)
Increase/
(Decrease) in Net
Exposure from
Net
December 31,
Exposure(5)
2014
(dollars in millions)
Singapore:
Sovereigns . . . . . .
Non-sovereigns . .
$2,792
146
326
404
$
57
$
123
$ 3,118 $
730
$ 3,118
(43)
687
$ 517
(179)
Subtotal . . . .
$2,938
730
57
$ 123
$ 3,848 $
(43) $ 3,805
$ 338
Canada:
Sovereigns . . . . . .
Non-sovereigns . .
$ 262
(373)
62
1,985
$
198
$
1,299
324 $
3,109
$ 324
(42)
3,067
$ 415
3
Subtotal . . . .
$ (111)
$ 2,047
$ 198
$1,299
$ 3,433 $
(42) $ 3,391
$ 418
61
699
16
596
$
300
$
934
$ 760
612
$ 300
$ 934
$ (354)
1,026
$
99
$
994
$ 220
(105)
Australia:
Sovereigns . . . . . .
Non-sovereigns . .
Subtotal . . . .
Netherlands:
Sovereigns . . . . . .
Non-sovereigns . .
Subtotal . . . .
42
427
77 $ $
77
2,529
(213)
2,316
42 $ (23) $
19
2,546
(209)
2,337
87
(441)
$ 469
$ 1,026
99
$ 994
$ 115
Switzerland:
Sovereigns . . . . . .
Non-sovereigns . .
34
(7)
7
850
$
226
$
1,219
41 $ $
41
2,288
(221)
2,067
34
4
Subtotal . . . .
27
857
$ 226
$1,219
38
(1) Net inventory represents exposure to both long and short single-name and index positions (i.e., bonds and equities at fair value and CDS
based on notional amount assuming zero recovery adjusted for any fair value receivable or payable). As a market maker, the Company
transacts in these CDS positions to facilitate client trading. At March 31, 2015, gross purchased protection, gross written protection and
net exposures related to single-name and index credit derivatives for those countries were $(255.6) billion, $252.8 billion and $(2.8)
billion, respectively. For a further description of the triggers for purchased credit protection and whether those triggers may limit the
effectiveness of the Companys hedges, see Credit ExposureDerivatives herein.
(2) Net counterparty exposure (i.e., repurchase transactions, securities lending and OTC derivatives) takes into consideration legally
enforceable master netting agreements and collateral.
(3) At March 31, 2015, the benefit of collateral received against counterparty credit exposure was $12.9 billion in the U.K., with 97% of
collateral consisting of cash, U.S. and U.K. government obligations, and $15.2 billion in Germany with 98% of collateral consisting of
cash and government obligations of Germany, France, Spain and Belgium. The benefit of collateral received against counterparty credit
exposure in the other countries totaled approximately $18.0 billion, with collateral primarily consisting of cash, U.S. and Japanese
government obligations. These amounts do not include collateral received on secured financing transactions.
(4) Amounts represent CDS hedges (purchased and sold) on net counterparty exposure and funded lending executed by trading desks
responsible for hedging counterparty and lending credit risk exposures for the Company. Based on the CDS notional amount assuming
zero recovery adjusted for any fair value receivable or payable.
(5) In addition, at March 31, 2015, the Company had exposure to these countries for overnight deposits with banks of approximately $6.9
billion.
156
Item 4.
Under the supervision and with the participation of the Companys management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Companys
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as
amended (the Exchange Act)). Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered
by this report.
No change in the Companys internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.
157
Assets
Interest earning assets:
Trading assets(1):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell and Securities borrowed(2):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer receivables and Other(3):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 89,652
118,355
$ 481
$ 113
2.2%
0.4
69,824
$ 201
1.2
66,686
282
$ 469
$
5
2.9
7.2
21,719
1,131
$
$
0.3
2.2
175,084
75,596
$ (153)
$ 49
(0.4)
0.3
65,288
23,211
$ 171
$ 126
1.1
2.2
$706,828
$1,484
0.9%
$
$
0.1%
0.3
131,899
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$838,727
$132,882
1,397
$
$
4
1.7
147,865
8,493
$ 917
$
9
2.5
0.4
19,403
59,604
$
$
65,005
36,137
$ 131
$ 177
0.8
2.0
120,351
57,849
$ (381)
$ 13
(1.3)
0.1
$651,049
$ 888
0.6
$ 596
0.3%
187,678
$838,727
158
17
1
1,130
933
16
6
Assets
Interest earning assets:
Trading assets(1):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest bearing deposits with banks:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell and Securities borrowed(2):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer receivables and Other(3):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and Equity
Interest bearing liabilities:
Deposits:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings(4):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings(4):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading liabilities(1):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase and Securities loaned(5):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer payables and Other(6):
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest bearing liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income and net interest rate spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
(2)
(3)
(4)
$109,299
116,111
$ 406
108
1.5%
0.4
55,431
138
1.0
43,577
383
340
15
3.2
15.9
44,161
6,745
27
11
0.2
0.7
168,006
88,317
(73)
64
(0.2)
0.3
68,726
16,879
$717,635
114,621
$832,256
159
148
$1,343
0.9
3.6
0.8%
$114,312
170
23
0.1%
142,747
9,464
920
12
2.6
0.5
23,836
56,132
99,858
66,079
141
185
0.6
1.1
755
487
109,887
44,166
$667,893
164,363
$832,256
(294)
48
$1,035
$ 308
(1.1)
0.4
0.6
0.2%
Interest expense on Trading liabilities is reported as a reduction of Interest income on Trading assets.
Includes fees paid on Securities borrowed.
Includes interest from Customer receivables and Other interest earning assets.
The Company also issues structured notes that have coupon or repayment terms linked to the performance of debt or equity securities,
indices, currencies or commodities, which are recorded within Trading revenues (see Note 3).
(5) Includes fees received on Securities loaned.
(6) Includes fees received from prime brokerage customers for stock loan transactions incurred to cover customers short positions.
159
$ (73)
2
$148
3
$ 75
5
36
27
63
180
(4)
(51)
(6)
129
(10)
(14)
(9)
3
4
(11)
(5)
(3)
(9)
(77)
(6)
(80)
(15)
(8)
56
20
(78)
12
(22)
$ 154
$ (13)
$ 141
$ (10)
1
(6)
1
33
(1)
(36)
(2)
(3)
(3)
(49)
(84)
39
76
(10)
(8)
(28)
15
(59)
(50)
(87)
(35)
$(110)
$ (37)
$(147)
$ 264
$ 24
$ 288
160
161
The following developments have occurred with respect to certain matters previously reported in the Form 10-K
or concern new actions that have been filed since December 31, 2014:
On February 23, 2015, the plaintiff in Sealink Funding Limited v. Morgan Stanley, et al. perfected its appeal of
the courts April 18, 2014 decision granting the Companys motion to dismiss the second amended complaint.
On February 25, 2015, the court in National Credit Union Administration Board v. Morgan Stanley & Co.
Incorporated, et al., pending in the United States District Court for the District of Kansas, granted in part and
denied in part defendants motion to dismiss the amended complaint in part. On March 23, 2015, plaintiff filed a
motion seeking reconsideration of the December 27, 2013 order granting defendants motion to dismiss in
substantial part.
On March 24, 2015, the court in Federal Deposit Insurance Corporation, as Receiver for United Western Bank v.
Banc of America Funding Corp., et al., denied defendants motion to dismiss in substantial part.
On April 3, 2015, the court in Deutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital
Holdings LLC, pending in the United States District Court for the Southern District of New York, granted in part
and denied in part defendants motion to dismiss the complaint.
On April 23, 2015, the court in Phoenix Light SF Limited et al v. Morgan Stanley et al. granted the Companys
motion to dismiss the amended complaint.
162
Item 2.
The table below sets forth the information with respect to purchases made by or on behalf of the Company of its
common stock during the quarterly period ended March 31, 2015.
Issuer Purchases of Equity Securities
(dollars in millions, except per share amounts)
Period
Total Number of
Shares Purchased
As Part of Publicly
Announced Plans
or Programs(C)
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
Total
Number of
Shares
Purchased
Average Price
Paid Per
Share
830,073
15,773,371
$34.93
$34.94
830,073
$ 281
3,572,029
156,011
$35.59
$34.48
3,572,029
$ 154
2,616,770
904,687
$35.87
$35.80
2,616,770
$3,185
7,018,872
16,834,069
$35.62
$34.98
7,018,872
$3,185
Month #1
(January 1, 2015January 31, 2015)
Share Repurchase Program(A) . . . . . . . . . . . .
Employee Transactions(B) . . . . . . . . . . . . . . .
Month #2
(February 1, 2015February 28, 2015)
Share Repurchase Program(A) . . . . . . . . . . . .
Employee Transactions(B) . . . . . . . . . . . . . . .
Month #3
(March 1, 2015March 31, 2015)
Share Repurchase Program(A) . . . . . . . . . . . .
Employee Transactions(B) . . . . . . . . . . . . . . .
Total
Share Repurchase Program(A) . . . . . . . . . . . .
Employee Transactions(B) . . . . . . . . . . . . . . .
(A) The Companys Board of Directors has authorized the repurchase of the Companys outstanding stock under a share repurchase program
(the Share Repurchase Program). The Share Repurchase Program is a program for capital management purposes that considers, among
other things, business segment capital needs, as well as equity-based compensation and benefit plan requirements. The Share Repurchase
Program has no set expiration or termination date. Share repurchases by the Company are subject to regulatory approval. In March 2015,
the Company received no objection from the Federal Reserve to repurchase up to $3.1 billion of the Companys outstanding common
stock beginning in the second quarter of 2015 through the end of the second quarter of 2016 under the Companys 2015 capital plan.
During the quarter ended March 31, 2015, the Company repurchased approximately $250 million of the Companys outstanding common
stock as part of its Share Repurchase Program. For further information, see Liquidity and Capital ResourcesCapital Management in
Part I, Item 2.
(B) Includes: (1) shares delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by holders of employee
and director stock options (granted under employee and director stock compensation plans) who exercised options; (2) shares withheld,
delivered or attested (under the terms of grants under employee and director stock compensation plans) to offset tax withholding
obligations that occur upon vesting and release of restricted shares; (3) shares withheld, delivered and attested (under the terms of grants
under employee and director stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding
shares underlying restricted stock units; and (4) shares withheld, delivered and attested (under the terms of grants under employee and
director stock compensation plans) to offset the cash payment for fractional shares. The Companys employee and director stock
compensation plans provide that the value of the shares withheld, delivered or attested, shall be valued using the fair market value of the
Companys common stock on the date the relevant transaction occurs, using a valuation methodology established by the Company.
(C) Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately
negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Company deems
appropriate and may be suspended at any time.
Item 6.
Exhibits.
An exhibit index has been filed as part of this Report on Page E-1.
163
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
MORGAN STANLEY
(Registrant)
By:
By:
164
EXHIBIT INDEX
MORGAN STANLEY
Quarter Ended March 31, 2015
Exhibit No.
3.1
Description
10.1
Agreement between Morgan Stanley and Colm Kelleher, dated January 5, 2015.
10.2
12
Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings
to Fixed Charges and Preferred Stock Dividends.
15
Letter of awareness from Deloitte & Touche LLP, dated May 4, 2015, concerning unaudited
interim financial information.
31.1
31.2
32.1
32.2
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated
Statements of Financial ConditionMarch 31, 2015 and December 31, 2014, (ii) the Condensed
Consolidated Statements of IncomeThree Months Ended March 31, 2015 and 2014, (iii) the
Condensed Consolidated Statements of Comprehensive IncomeThree Months Ended March 31,
2015 and 2014, (iv) the Condensed Consolidated Statements of Cash FlowsThree Months
Ended March 31, 2015 and 2014, (v) the Condensed Consolidated Statements of Changes in Total
EquityThree Months Ended March 31, 2015 and 2014, and (vi) Notes to Condensed
Consolidated Financial Statements (unaudited).
E-1